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ACCA Passcards Paper P3 Business Analysis Passcards for exams up to June 2015
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Professional Paper P3 Business Analysis
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First edition 2007, Eighth edition June 2014 ISBN 9781 4727 1131 1 e ISBN 9781 4727 1187 8 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Published by BPP Learning Media Ltd, BPP House, Aldine Place, 142-144 Uxbridge Road, London W12 8AA
Printed in the UK by RICOH UK Limited Unit 2 Wells Place Merstham RH1 3LG
www.bpp.com/learningmedia Your learning materials, published by BPP Learning Media Ltd, are printed on paper obtained from traceable sustainable sources.
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All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of BPP Learning Media. © BPP Learning Media Ltd 2014
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Preface
Contents
Welcome to BPP Learning Media’s ACCA Passcards for Professional Paper 3 Business Analysis. They focus on your exam and save you time. They incorporate diagrams to kick start your memory. They follow the overall structure of BPP Learning Media’s Study Texts, but BPP Learning Media’s ACCA Passcards are not just a condensed book. Each card has been separately designed for clear presentation. Topics are self contained and can be grasped visually. ACCA Passcards are still just the right size for pockets, briefcases and bags. Run through the Passcards as often as you can during your final revision period. The day before the exam, try to go through the Passcards again! You will then be well on your way to passing your exams. Good luck!
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Preface
Page
Contents
Page
1
Business strategy
1
12
E-marketing
129
2
Environmental issues
7
13
Project management
145
3
Competitors and customers
17
14
Finance
161
4
Strategic capability
27
15
Human resource management
173
5
Stakeholders, ethics and culture
41
16
Strategic development
179
6
Strategic choices
53
7
Organising for success
73
8
Managing strategic change
89
9
Business process change
95
10
Improving processes
105
11
E-business
111
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1: Business strategy
Topic List What is strategy? Levels of strategy in an organisation Elements of strategic management The importance of context The strategy lenses
This chapter gives you an overview of the fundamentals of strategy and strategy formulation, and how they relate to business analysis.
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What is strategy?
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Levels of strategy in an organisation
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Elements of strategic management
The importance of context
The strategy lenses
STRATEGY: a course of action over the long term, including identifying the competences and resources required, to achieve a specific objective and fulfil stakeholder expectations.
Areas for decision making
Strategic decisions
Long term direction
Complex
Scope of activities
Subject to uncertainty
Competitive advantage
Impact operational decisions
Adapting activities to fit business environment
Affect whole organisation
Exploiting resources/competences Expectations of key stakeholders
Four elements of mission
Purpose and planning Values Strategy Policies and standards
Lead to change GOALS:
General aim
OBJECTIVES: SMART and PRIME
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What is strategy?
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Levels of strategy in an organisation
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Elements of strategic management
The importance of context
The strategy lenses
Three main levels of strategy in an organisation 1
Corporate
Overall purpose and scope, and how value will be added. Prioritisation and management of stakeholder expectations. Allocation of corporate resources.
2
Business
How to compete successfully in particular markets. Combines with corporate strategy in a small organisation. In larger organisations, strategies for strategic business units must be co-ordinated with corporate strategy, and with each other.
3
Operational
How the component parts of the organisation deliver the higher-level objectives. Largely created and delivered by business functions such as marketing, production, finance, human resources management, and information systems.
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1: Business strategy
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What is strategy?
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Levels of strategy in an organisation
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Elements of strategic management
The importance of context
The strategy lenses
Johnson, Scholes and Whittington’s model of strategy Strategic position Environment opportunities threats complexity Capability resources and competences strengths weaknesses Stakeholder expectations purpose of strategy power/interest governance ethics
Strategic choices
Strategy into action
Made at corporate and business levels
How to achieve competitive advantage
Scope Direction of development Method of development
Structuring
Enabling
Choice
management of resources
Change
Position
processes relationships
change management
Action is not simply a linear model.
Need to recognise the interdependencies between position (analysis), choice and action (implementation).
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What is strategy?
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Levels of strategy in an organisation
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Elements of strategic management
The importance of context
The strategy lenses
The context of strategy The organisational setting in which strategy is developed. Possible contexts include: Small business
Limited product range, markets and resources (especially financial), but significant pressure from competitors
Multinational
Diverse products, processes and markets, with significant resources and multiple operations
The public sector
Constraints on funding, commitment to service provision and the need to demonstrate value
Not for profit organisation
Diverse sources of funds, strong underlying values and purpose
Intangible products
Product information, after-sales service, brand values, staff performance (for both manufacturing and service companies)
Exam focus Context is very important in the P3 exam. Question scenarios will provide context for the question requirements. You must always consider the context of the question and make your answer directly relevant to it. Page 5
1: Business strategy
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What is strategy?
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Levels of strategy in an organisation
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Elements of strategic management
The importance of context
The strategy lenses
Johnson, Scholes & Whittington suggest that strategy, and the development of strategic thinking, can be examined through three lenses.
1
Strategy as design
a rational, top-down process – rational managers, clear objectives. Strategy is exclusively management’s responsibility, and the organisation’s role is to implement management’s plans.
2
Strategy as experience
an adaptation of what has worked in the past – based on experience, assumptions, and decisions to satisfice rather than optimise. Strategies develop in incremental and adaptive ways, and emerge from lower levels of the organisation.
3
Strategy as ideas
strategy based on innovation, diversity of ideas, informal interaction and experimentation. Managers create the context and conditions for new ideas to emerge, but must prevent strategic drift. Organisational culture must support innovation.
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2: Environmental issues
Topic List The organisation in its environment The macro environment The competitive advantage of nations The environment in the future Competitive forces
Understanding the changing environment is one of the key elements in both defining and developing strategy. One possible definition of corporate strategy is ‘seeking a good fit with the environment’. To achieve that ‘fit’, an organisation must have a thorough knowledge of its environment.
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The macro environment
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The competitive advantage of nations
The environment in the future
Competitive forces
All organisations are open systems – they have a variety of interchanges with the environment (inputs and outputs). The environment can be divided into three concentric layers: Environmental element
Basis of analysis
Macro-environment
PESTEL Key drivers of change Scenarios
Industry or sector
Five forces (Porter) Cycles of competition
Competitors and markets Strategic groups Market segments Critical success factors
Macro-environment Industry or sector
Competitors and markets
The organisation
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The macro environment
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The competitive advantage of nations
The environment in the future
Competitive forces
The PESTEL framework is based upon six segments: political, economic, socio-cultural, technological, environmental protection and legal.
Political/legal factors
Economic factors
Governments oversee framework in which business operates eg physical, social and market infrastructure.
These operate in both a national and international context. Relevant factors include:
Many aspects of business activity are subject to legal regulation:
Contracts Employment Health and safety Tax Other aspects are regulated by supervisory bodies. The EU is a significant influence.
Inflation rates Employment rates Interest rates Tax levels The business cycle
Growth/fall of GDP Savings levels Exchange rates International trade Capital markets
Government policy Political change and political risks affects the planning activities of many businesses Page 9
Fiscal policy (taxes, borrowing, spending) Monetary policy (interest rates, exchange rates) Size and scope of the public sector 2: Environmental issues
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The macro environment
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The competitive advantage of nations
The environment in the future
Competitive forces
Social factors
Technological factors
Demography is the study of human population and population trends. (eg birth rate, average age, ethnicity, death rate, family structure, social structure and wealth). Demographic changes have clear implications for patterns of demand. They also affect availability of labour. Can also affect recruitment policies.
Many strategies are based on exploiting technological change (eg Internet and e-commerce). Others are defences against such change (eg emphasising service or quality when a competitor introduces a major technical development).
Culture in society provides a framework for understanding beliefs and values, and creates patterns of human activity. It influences tastes and lifestyles. Affects: Marketing - may need to adapt products/services for a particular market. HR - cultural differences in recruitment. Business must be particularly aware of cultural change.
Technological developments affect all aspects of business (especially IT developments)
New products and services become available New methods of production and service provision New ways of selling (e-commerce); Improved handling of information in sales and finance New organisation structures to exploit technology New media for communication with customers and within the business (eg Internet and email); facilitates business becoming global.
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Environmental protection Pressure coming from many quarters: Green pressure groups Employees Corporate Social Responsibility
Legislation Environmental risk screening
Possible green issues for businesses to consider: Consumer demand for environmentally friendly products
Scarcity of non-renewable resources
Greater regulation by governments and international bodies
Opportunities to develop new environmentally friendly products and technologies
Sustainability of operations.
Businesses may be charged for the external cost of their activities Page 11
2: Environmental issues
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The macro environment
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The competitive advantage of nations
The environment in the future
Competitive forces
Four aspects of globalisation are key drivers of change in the macro environment
1
Market globalisation
Converging tastes; improving communications.
2
Cost globalisation
Economies of scale are a major source of cost advantage; purchasers search globally for lowest-cost suppliers.
3
Government policy
Increasingly sympathetic to free trade.
4
Global competition
High levels of international trade encourage global competition. The existence of global competitors and global customers in an industry encourages firms which currently only trade in one country to expand to be able to compete more effectively.
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The macro environment
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The competitive advantage of nations
The environment in the future
Competitive forces
Porter identifies four determinants of national competitive advantage on an industry basis. He refers to them as the ‘diamond’.
Firm strategy, structure and rivalry Cultural factors, management style, time horizons and capital markets all help determine orientation and capability. Domestic rivalry leads to competitive strength.
Factor conditions
Demand conditions
Endowments of inputs to production Basic: natural resources, climate, labour unsustainable for competitive advantage Advanced: infrastructure, technical education, hightech industries - promote competitive advantage
Buyers in the home market set fundamental parameters such as market segments, degree of sophistication, rate of growth and rate of innovation. Early saturation of the home market will encourage a firm to export.
Related and supporting industries Success in related industries gives mutual support. Strong home suppliers make the industry more robust. Rivalry creates supplier specialisations. Clusters of related industries derive strength from their links. Page 13
2: Environmental issues
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The macro environment
Forecasting Sound knowledge of the environment requires some element of forecasting. The past is not necessarily a good guide to the future, but in simple, static conditions time series analysis and regression analysis can be used. Economic forecasting uses leading indicators to assess future economic conditions. A scenario is a detailed and consistent view of how the environment might develop in the future. Macro scenarios consider possible futures overall. Industry scenarios look in more detail at a single industry.
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The competitive advantage of nations
The environment in the future
Competitive forces
Scenario construction (Mercer) 1
Identify drivers of change
2
Arrange drivers in a viable framework
3
Produce 7-9 mini-scenarios
4
Group mini-scenarios into 2-3 comprehensive scenarios
5
Write up the scenarios
6
Identify issues arising, and what they mean to the business
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The macro environment
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The competitive advantage of nations
The environment in the future
Competitive forces
Porter says that five forces together determine the long-term profit potential of an industry
1 Bargaining power of suppliers Depends on:
Number of suppliers
Threats to suppliers' industry
Number of customers in the industry
Scope for substitution
Switching costs
Selling skills
2
Scale economies Switching costs Patent rights
4
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Product differentiation Access to distribution Access to resources
Rivalry among current competitors Depends on:
Market growth Buyer’s ease of switching Spare capacity Exit barriers Uncertainty about competitor’s strategy
5 Suppliers seek higher prices
Threat of new entrants This is limited by barriers to entry
3 Bargaining power of customers Depends on:
Volume bought
Scope for substitution
Switching costs
Purchasing skills
Importance of quality
Threat from substitute products
A substitute is produced by a different industry but satisfies the same needs
Customers seek lower prices 2: Environmental issues
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Notes
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3: Competitors and customers
Topic List Competition dynamics The marketing mix Customers and segmentation Understanding the customer
A detailed knowledge of both competitors and customers is very important for strategy development. In particular, the cycle of competition and critical success factors are very examinable.
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Competition dynamics
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The marketing mix
Customers and segmentation
Understanding the customer
Cycle of competition Encirclement Simultaneous flank attacks Incumbent
Flank Neglected segment area of technology
Head-on Identical marketing mix
Challenger Attacks
Contraction Concentrate on most desirable markets Incumbent
Flanking Position Defends Guerilla secondary Change nothing Aggressive, short markets term moves Pre-emtive Attack first Bypass Unrelated products, new areas, technical Challenger advances Defences
Mobile Broaden and diversity markets
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Industry life cycle Inception
Growth
Basic, no standards Product characteristics established
Maturity/shakeout
Decline
Improved design and quality, Standardised product with differentiated little differentiation Competition increases, Competitors None to few Many entrants weaker players leave Early adopters, prosperous, More customers attracted Mass market, brand Buyers curious must be induced and aware switching common Negative – high first mover Good, possibly starting to Eroding under pressure of Profits advantage decline competition Technologies become more Technology is understood Technology No standards established standardised across the industry Small scale batch Mass production. Long production runs. Cost Production processes production. Distribution networks efficiency critical expanded Specialised distributors
Varied quality but fairly undifferentiated Few remain. Competition may be on price Enthusiasts, traditionalists, sophisticates Variable Technology is understood across the industry Overcapacity. Production is reduced
Exam focus point For an organisation’s strategy to be successful, it needs to be appropriate to where its industry or products are in their lifecycles. Page 19
3: Competitors and customers
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Competition dynamics
Design
Product
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The marketing mix
Customers and segmentation
Place
Features Quality and reliability After sales service Trade off between price and value offered to customer
Promotion
Market channels
Understanding the customer
Logistics Direct distribution or use of intermediaries? Speed of delivery
Advertising (on line; off line)
Sales promotion Direct selling Public relations
Marketing mix
Price Luxury or necessity? Competitors’ prices Quality connotations Discounts Payment terms
People
Service and service provider are inseparable in service marketing Front-line staff embody the service Customer satisfaction?
Processes
Efficiency; standardisation; automation Queuing and waiting times Capacity management Information gathering and processing
Physical evidence
Evidence of ownership for services (intangibility) Design and specification of service environment
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Competition dynamics
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The marketing mix
Customers and segmentation
Understanding the customer
Buyer behaviour models aim to show how purchase decisions are made. We can distinguish CONSUMER markets and INDUSTRIAL markets. Industrial buyers are more rationally motivated than consumers in deciding what goods to buy. Government, reseller and export markets may also be considered.
The consumer market Influences Socio economic Psychological
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Products Convenience (everyday) goods Shopping (higher value) goods Speciality (unique) goods
3: Competitors and customers
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Competition dynamics
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The Marketing mix
Customers and segmentation
Understanding the customer
The industrial market Influences
Products
Quality and reliability Price Credit offered Problems solved Budgetary control
Raw materials Subcomponents Capital equipment Supplies
Decision Making Unit User Gatekeeper
Influencer Buyer
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Reasons for segmentation
Market segmentation is the subdividing of a market into increasingly homogeneous subgroups of customers, where any subgroup can be conceivably selected as a target market to be met with a distinct marketing mix. It is relevant to a focus strategy.
Target market
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Better satisfaction of customer needs Revenue/profit growth Targeted communication Customer retention Product positioning
Segments should be
Measurable Potentially profitable Accessible, and can Susceptible to a distinct marketing mix be accessed profitably Stable
One or more segments selected for special attention by a company.
A firm should only develop a unique marketing mix for a valid segment. Same product to whole market
Policy options
One segment only
UNDIFFERENTIATED CONCENTRATED DIFFERENTIATED
Several versions for many segments Page 23
3: Competitors and customers
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Competition dynamics
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The marketing mix
Customers and segmentation
Understanding the customer
Tools for analysis 1 Marketing audit
2 Key customer
3 Customer profitability analysis
analysis To establish: Size of customer base Order sizes Product profitability Market share Growth and prospects Demand Price sensitivity Competition/substitutes
The customer lifecycle
Who are the key customers? Customer history How important are they? Attitudes and behaviour Financial performance Profitability of their orders
This varies from customer to customer because of customer-specific costs such as discounts, distribution costs, complexity of orders and credit given. Use it to identify your most profitable/expensive customers Compare cost of acquiring new customers vs retaining existing ones Details of costs could be obtained from a relational database
Promotional expense is front-loaded; sales grow with time Consumer incomes rise with time; early purchases are likely to be basic – may be more differentiated later
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Strategic customer
Opportunities and threats
is the purchaser of the product offered. This may not be the end user. The end user’s requirements are important, but those of any intermediary purchaser are of primary strategic importance.
Information about the environment may be summarised as opportunities and threats.
Critical success factors are those product features that are particularly valued by a group of customers and, therefore, where the organisation must outperform competitors.
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Opportunities Opportunities often take the form of strategic gaps such as: Potential substitutes for existing products or complements to them Different strategic customers via new distribution methods such as the Internet Potential new market segments Threats The most immediate threats probably emerge from the immediate industry: the five forces are a good guide. The wider PESTEL environment must also be monitored, but threats may be more difficult to recognise. 3: Competitors and customers
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Competition dynamics
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Marketing
Customers and segmentation
Understanding the customer
External forces
Customers and markets
Industry analysis
Macro-environment Political Economic Social Technological Environmental Legal
New entrants Substitute products Bargaining power of customers Bargaining power of consumers Rivalry amongst current competition
National competitiveness
Understanding the customer
Demand conditions Related industries
Factor conditions
Firm strategy, structure, rivalry
Inception Growth Maturity Decline
Opportunities or Threats
Strategic groups CSFs Market segmentation Marketing mix
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4: Strategic capability Topic List The organisation’s resources Cost efficiency Knowledge The value chain The product portfolio Benchmarking Managing strategic capability SWOT and TOWS
A detailed knowledge of the frameworks and models in this chapter is very important in beginning to understand how strategic choices are made.
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Cost efficiency
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Knowledge
The value chain
The product portfolio
Benchmarking
Strategic capability: the adequacy and suitability of an organisation’s resources and competences to achieve its strategy.
9 Ms Model (review of organisation’s resources) Machinery Markets Management information
Makeup Materials Money
Management Methods Men and women
Position-based strategy aims to achieve competitive advantage by positioning a market offering to respond to the opportunities and threats present in the environment. Resource-based strategy is based on the possession of distinctive resources, which may be physical resources or competences. Competences are the activities and processes through which an organisation deploys its resources effectively. Threshold competences and resources meet customer’s minimum requirements and are needed for survival. Unique resources and core competences underpin competitive advantage and are difficult for competitors to imitate or obtain.
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Cost efficiency
Knowledge
If competitive advantage is to be based on core competences and strategic capabilities, the capabilities must have four key qualities:
1 2 3 4
Offer value to buyers – contribute to customer needs Rare – can create competitive advantage by itself Robust (difficult to imitate) – linking of processes and activities in ways that cannot be copied Non substitutable – substitute products and competences are a key threat
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The value chain
The product portfolio
Benchmarking
Cost Efficiency is fundamental to strategic capability for both public and private sector organisations. It is regarded as a threshold competence (vital for mere survival) and is achieved in four main ways:
1
Exploitation of scale economies – reducing costs per unit
2
Control of the cost of incoming supplies – transport costs; supplier relationships
3
Careful design of products and processes – minimising direct and indirect costs
4
Exploitation of experience effects – learning curve effects; outsourcing
4: Strategic capability
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Cost efficiency
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Knowledge
The value chain
The product portfolio
Benchmarking
The progression from data to knowledge Data
Information
Knowledge
Nature
Facts
Relationships between processed facts
Patterns discerned in information
Importance of
Total
Some
Context independent
Mundane
Probably useful for management
May be strategically useful
Office automation Data warehouse
Groupware Expert systems Report writing software Intranet
Data mining Intranet Expert systems
context Importance to
business Relevant IT systems
The aim of knowledge management is to capture, organise and make widely available all the knowledge that the organisation possesses (ie use knowledge as a resource to contribute to competitive advantage).
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Learning based strategy incorporates knowledge management and innovation.
Knowledge management Records, organises, retrieves and applies knowledge effectively. IT systems will probably be used. Good knowledge management avoids constant re-invention of the wheel.
Innovation Innovation is encouraged by top management; organisational purposes are continually re-examined; it is accepted that innovative solutions can emerge at any level.
A top-down, command and control approach will not promote learning based strategy. The company must be open to the environment and welcome new ideas and fresh insights. However, management must guide the learning process and take necessary decisions.
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4: Strategic capability
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FIRM INFRASTRUCTURE TECHNOLOGY DEVELOPMENT
IN RG MA
SUPPORT ACTIVITIES
Porter grouped the various activities of an organisation into a value chain.
HUMAN RESOURCE MANAGEMENT
MA RG IN
PRIMARY ACTIVITIES
The value chain
The product portfolio
Benchmarking
The margin is the excess the customer is prepared to pay over the cost to the firm of obtaining resource inputs and providing value activities. It represents the value created by the value activities themselves and by the management of the linkages between them. Linkages connect the activities in the value chain. The activities affect one another and therefore must be coordinated. Using the value chain. A firm can secure competitive advantage in several ways.
PROCUREMENT
INBOUND OUTBOUND MARKETING OPERATIONS SERVICE LOGISTICS LOGISTICS & SALES
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Invent new or better ways to do activities Combine activities in new or better ways Manage the linkages in its own value chain Manage the linkages in the value network
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A firm’s value chain is connected to the value network.
Distributor/retailer value chains Organisation’s value chain Supplier value chains
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Customer value chains
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The value created for a product's end user is often the output of a complex system that includes several organisations’ value chains. The links between these value chains represent opportunities to create more value. The links also represent opportunities for individual organisations to capture more of the value created by the overall system by managing them to their advantage. This can be done in a direct way by vertical integration or the use of bargining power over suppliers and customers. It can also be achieved more subtly by providing coordination and by fostering relationships that promote innovation.
4: Strategic capability
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Cost efficiency
The company’s offerings to the market are fundamental to its success. They must be kept under review so that there is a suitable mix. The product life cycle is an important concept but it must be applied with care. We can distinguish 3 aspects of ‘product’.
1
Product class (or generic product) – a broad category
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Knowledge
Product form – type within the category
3
Brand – The specific product
The product portfolio
Benchmarking
Product life cycle £
Sales
+ _
Profits
Inception
2
The value chain
Growth
Maturity
Decline
Senility
Inception: development; marketing and production costs high; sales volume low; profits low Growth: sales volumes accelerate; unit costs fall; profits rise; competitors enter the market Maturity: longest period; profits good; reminder promotion Decline: many causes; sales fall; over capacity in industry; some players leave market Senility: profit negligible; product may be retained in niche
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The development of new products is an important aspect of a firm’s strategy. New products can overcome entry barriers and help give a company a balanced portfolio. Product innovation can also be a major source of competitive advantage. How are they new?
New to the world New product line Additions to product line Repositioning Improvements/revisions Cost reductions
How is it approached? Leader strategy: high cost of R&D, potential high reward, high risk Follower strategy: lower cost, less R&D expertise needed, lower risk, reduced reward
The management accountant can help by analysing the cost components of the new product. This may lead to the removal of superfluous features.
New product development should be controlled by subjecting projects to a series of gates, or review meetings, to decide whether they have made the required progress, and to determine what must be achieved to pass the next gate. Page 35
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Knowledge
The value chain
The product portfolio
Benchmarking
Roles of the R&D department
Environmental analysis: technological opportunities and threats.
Technological position audit.
Planning and controlling R&D.
Developing new products.
Developing new processes.
Encouraging a culture of innovation and learning.
New product research including developing, testing and prototyping. Screening product ideas against strategic objectives, technical feasibility and market requirements. Value engineering of existing products. Extending product life cycles. Ensuring (or preventing) backward compatibility with existing products. Processes themselves may be crucial, as in service industries. Productivity enhancements. Quality enhancements.
Intrapreneurship The R&D effort should support the organisation’s strategy. For example, product development and market development are likely to require different R&D emphases.
Entrepreneurial activity below the strategic apex. Innovation is encouraged by: Culture of risk-taking and tolerance of mistakes. Flexible organisation structure. Willingness to devote resources to new ideas. Reward policies that support new ideas.
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Knowledge
Benchmarking involves establishing targets and comparators against which to compare performance.
Process 1 Ensure senior management commitment 2 Determine areas to benchmark and set objectives
The value chain
The product portfolio
Benchmarking
The questions to ask (Johnson, Scholes and Whittington)
Why are these products or services provided at all? Why are they provided in that particular way?
3 Establish performance measures
What are the examples of best practice elsewhere?
4 Select organisations to benchmark against
How should activities be reshaped in the light of these comparisons?
5 Measure own and others’ performance 6 Compare performance
3 levels of benchmarking Resources: quantity and quality
7 Design and implement improvements
Competences in separate activities
8 Monitor improvements
Competences in linked activities
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Cost efficiency
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Knowledge
The value chain
The product portfolio
Benchmarking
Problems with benchmarking Benchmarking can produce improvements in the value system but this is not guaranteed. It tends to improve the efficiency with which systems work rather than the effectiveness of their outputs. Benchmarking will only be useful if the systems being compared are the ones which are critical for business success. (It sometimes concentrates on ‘doing things right’ rather than ‘doing the right things.’) Comparison with similar systems ignores the emergence of substitutes. It is a catching–up exercise rather than a development of anything new. It does not indicate how competitors may be overtaken. It has significant costs, not least in management time. It can be a threat to commercial security.
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Managing strategic capability
SWOT and TOWS
Informal processes Existing strategic capability can be difficult to understand and, therefore, to manage, especially when it derives from core competences based on informal processes. Managers must take care not to disrupt such competences by attempting to manage or formalise them.
Opportunities to stretch and improve strategic capability
HRM Much strategic capability depends on people’s abilities, skills and knowledge. Such capability can be enchanced by HRM practice.
Use existing competences in new activities Eliminate or outsource activities that do not support CSFs Extend best practice Improve and add activities to better support CSFs Remedy weaknesses Utilise external capacity by acquisition and cooperation (alliances; joint ventures)
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Recruit for specific aptitudes such as leadership and innovation Train and develop for specific rather than generic skills Develop individual strategic awareness
4: Strategic capability
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Managing strategic capability
SWOT analysis (also known as corporate appraisal) is a review of: INTERNAL
EXTERNAL
Strengths Weaknesses
Opportunities Threats
SWOT and TOWS
Weihrich spoke of TOWS analysis to emphasise threats and opportunities. SO strategies can be profitable in the short term, generating the cash needed to undertake WO strategies in the longer term. ST and WT strategies are likely to be resource neutral and are needed in the medium term to achieve overall balance.
and how they can be related. The results can be combined in guiding strategy formation
Internal
Strengths Match
External
Opportunities
Weaknesses Convert
Threats
Remedy
SO strategy – employ strengths to seize opportunities ST strategy – employ strengths to counter or avoid threats. WO strategy – address weakness in order to exploit opportunity WT strategy – defensive, avoid threats and impact of weakness
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5: Stakeholders, ethics and culture
Topic List Ethics and the organisation Social responsibility Corporate governance The role of culture Integrated reporting
Business ethics is an increasingly important area, and one that is highly examinable both for its topicality and its suitability for inclusion in scenario questions. Ethical ideas have a strategic impact upon organisations, and with them come notions of corporate social responsibility and principles of good corporate governance. The influence of culture upon an organisation and its people must not be underestimated. Finally, the rise of integrated reporting is considered.
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Social responsibility
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Corporate governance
The role of culture
Integrated reporting
Ethics are ideas about right and wrong that set standards for conduct. Ethics are important to business because society considers such things important. There are also rules of professional conduct to consider. Ideas of right and wrong have become more fluid and less absolute. As a result there is a greater scrutiny of organisations’ behaviour since it is likely to be less subject to definitive internal rules.
Scope of corporate ethics Corporate ethics may be considered in three contexts:
1
The organisation’s interaction with national and international society
2
The effects of the organisation’s routine operations.
3
The behaviour of individual members of staff
Organisations often publish corporate ethical codes to disseminate their policies on ethics.
Ethical dilemmas Conflicting views of the organisation’s responsibilities create ethical dilemmas for managers at all levels.
Dealing with corrupt or unpleasant regimes
Honesty in advertising
Employees – cost or asset?
Corrupt payments to officials – extortion, bribery or gift? The local culture must be considered.
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Social responsibility
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Corporate governance
The role of culture
Integrated reporting
Should businesses actively practise social responsibility? The business as fixer of social problems
Examples Charitable donations Pollution control Community activities
Big business has the resources to fight inequalities
BUT Companies already discharge their responsibilities by contributing towards tax revenues. The social audit recognises the expectations on a firm to promote social responsibility. In addition, there are ‘green’ pressures. Page 43
Pressure groups Employees Legislation
Environmental screening Sustainability of resources Ecological concerns
? Long term v Short term
5: Stakeholders, ethics and culture
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Social responsibility
Stakeholders have a legitimate interest in how the organisation behaves. The extent to which stakeholders should be able to influence behaviour is subject to debate, as is the matter of just who should qualify as a stakeholder. Some groups will be accepted as stakeholders and their views will help to determine the acceptability of a strategy.
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The role of culture
Corporate governance
Stakeholders’ interests are liable to conflict. Mendelow’s stakeholder mapping helps the organisation to establish its priorities and manage different stakeholder expectations.
Level of interest Low
High
Low A
B
C
D
Power Stakeholders can be: Internal Connected External
Integrated reporting
High
A: Minimal effort B: Keep informed; little direct influence but may influence more powerful stakeholders C: Treat with care; often passive but capable of moving to segment D; keep satisfied D: Key players – strategy must be acceptable to them, at least
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Social responsibility
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Corporate governance
The role of culture
Integrated reporting
The conduct of an organisation’s senior officers constitutes its corporate governance. The influence of those officers over the behaviour of the organisation and the potential for both PR and financial disaster make this a matter of strategic importance. External measures to improve corporate governance 1 Accounting standards attempt to prevent financial manipulation 2 Codes of professional conduct regulate many senior managers 3 Commissions on standards of behaviour (in the UK) have established best practice Free flow of information to stakeholders tends to inhibit wrong doing by senior managers. However, commercial confidentiality must be respected.
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Structural measures
Non-executive directors may remain objective and ensure proper governance in such areas as ethics, audit and senior manager remuneration. However, there are now accusations of partiality within a closeknit body of non-executives in the UK. 5: Stakeholders, ethics and culture
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Social responsibility
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Corporate governance
The role of culture
Integrated reporting
The governance framework
Good corporate governance
Establishes who the organisation exists to serve and how its purposes and priorities should be decided. Separation of ownership and control brings the risk of adverse selection and moral hazard.
Codes of best practice identify the way large companies should be run. Among their provisions are these:
Good corporate governance
Reduces risk Improves performance Improves external perceptions Ensures an organisation’s strategy is directed towards the benefit of legitimate stakeholders
Directors should use independent judgement; the roles of Chairman and CEO should be separate; no individual or group should dominate; there should be a balance of executive and non-executive directors. Director’s remuneration should be subject to formal and clear procedures and be largely controlled by non-executive directors. Non-executive directors’ audit committee should oversee both internal and external audit.
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Social responsibility
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Corporate governance
The role of culture
Integrated reporting
Organisational culture consists of the beliefs, attitudes, practices and customs that affect people during their interaction with an organisation. It can have an important influence on strategy, both in the way that information is interpreted and also by determining the acceptability of ideas and behaviour.
The paradigm The basic assumptions and beliefs that an organisation’s decision-makers hold in common and take for granted. It is essentially conservative since it is based on collective experience. It is closely linked to the ‘strategy as experience’ lens.
The cultural web J, S and W suggest that the paradigm is reinforced by physical aspects of culture.
Stories Rituals and Routines
The Paradigm
Control systems
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Symbols Power structures
Organisational structures
The cultural web provides a way of understanding behaviours within an organisation and making sure all the organisational elements are aligned with one another, and with an organisation’s strategy. If an organisation is not delivering the results management wants, is organisational culture contributing to the under-performance? The cultural web can be very useful in change management. 5: Stakeholders, ethics and culture
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Social responsibility
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Corporate governance
The role of culture
Integrated reporting
Integrated reporting is concerned with conveying a wider message on organisational performance. It is fundamentally concerned with reporting the value created by the organisation's resources.
Rise of integrated reporting Traditional corporate reporting is said to only tell part of the story. Stakeholders are increasingly interested in understanding how management use the organisation's resources to create value.
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Value creation
The International Integrated Reporting Council introduced the Integrated Reporting Framework. The framework defines resources as 'capitals'.
Capitals are used to assess value creation. The framework classifies capitals as being:
Intellectual Capital
Manufactured Capital
Financial Capital
Integrated Reporting Capitals Human Capital
Natural Capital Social Capital
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Corporate governance
The role of culture
Interaction of capitals An increase in one capital may result in a decrease in another.
Example Paying for a staff training programme may increase human capital (eg improve staff skills), but reduce financial capital as the costs of the training programme will lead to a reduction in the company's financial reserves (eg money).
Integrated reporting
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Integrated reporting does not involve attaching monetary values to every part of an organisation's operations. Value creation can be measured by the use of qualitative and quantitative performance measures.
Example Customer satisfaction can be measured by comparing the number of customers retained year on year.
Implications of introducing integrated reporting
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IT costs
Consultancy costs
Staff costs
Disclosure
5: Stakeholders, ethics and culture
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Notes
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6: Strategic choices Topic List Diversification The corporate parent The corporate portfolio Generic strategies Sustaining competitive advantage Direction and method of growth Strategy and market position Success criteria
Various strategic choices can present themselves to an organisation. An organisation will select its preferred choice as a result of environmental and internal analysis that shows which choice provides the best strategic ‘fit’ for the organisation. There is no right or wrong answer: different frameworks and models will apply in different business settings.
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Diversification
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The corporate parent
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The corporate portfolio
Generic strategies
Sustaining competitive advantage
Diversity of products and markets may be advantageous to the organisation for three reasons:
1
Economies of scope in the form of synergy
2
Corporate management skills are extended
3
Cross-subsidy can enhance market power
However, there are three questionable reasons that may be given to justify a policy of diversification:
1
Response to environmental change may be a cover for protecting the interests of top management and may lead to ill-considered acquisitions.
2
Risk spreading is valid for owner managed businesses, but shareholders in large public companies can diversify their own portfolios.
3
Powerful shareholder expectations, especially demands for growth, can lead to inappropriate diversification.
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Conglomerate (unrelated) diversification
Horizontal integration Development into activities that are competitive with, or complementary to, present activities; eg, electricity companies selling gas. Offers economies of scale.
Vertical integration The organisation becomes its own supplier (backward integration) or distributor (forward integration). Secures supplies Stronger relationship with end-users Profits from all parts of value system Creates barriers to entry However:
‘More eggs in same end-market basket’ (Ansoff) – more vulnerable to a single market
Spreads risk; escape from present business
May obtain synergy (eg acquiring new skills, utilising distribution channels, pooling R+D) organisational learning.
Use surplus cash/exploit under-used resources
However: Unfamiliarity with new segments increases risk More opportunities to go wrong Lack of common culture and purpose
Withdrawal Demerger
Other strategies
Does not offer significant economies of scale Page 55
6: Strategic choices
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The corporate parent
The corporate portfolio
International business orientations (Perlmutter) Ethnocentrism is a home country orientation in which the same products are marketed in the same way both at home and in foreign countries. Polycentrism adapts products and marketing methods to each local environment. Each national subsidiary runs its own operations. Geocentrism recognises both similarities and differences between markets and incorporates them into regional or global strategies. Regiocentrism is similar to geocentrism but considers that there are differences between regions.
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Generic strategies
Sustaining competitive advantage
Global strategic management (Ohmae) 5 reasons why companies globalise (5 C’s) 1 2 3 4
Customer: Company: Competition: Currency: 5 Country:
global market convergence search for economies of scale demands global operations manage exchange rate risk by operating globally explicit absolute and comparative advantage
5 stages in global expansion 1 Exporting via agents to extend scale of operations 2 Overseas branches to replace agents with stronger presence 3 Overseas production exploits cheap labour and saves shipping costs 4 Insiderisation via full capability: polycentric orientation 5 Global company has geocentric management orientation
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Key decisions for international expansion
1.
2.
Whether to market abroad at all?
Adv Higher sales and profits Life cycle extended Spread seasonality Spread risk Disadv Less control Costly Adaptations needed Page 57
Which markets to enter?
3.
Mode of entry?
Direct or Foreign Market attractiveness indirect subsidiaries or Competitive advantage possessed exporting joint ventures Risks (political; business; currency) Overseas Legal/regulatory factors production Before getting involved, the company must consider both strategic (‘Does it fit?’) and tactical/operational (‘Can we do it?’) issues. 6: Strategic choices
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The corporate portfolio
Generic strategies
Sustaining competitive advantage
Entry strategies
Overseas production
Exporting
Indirect Export management firms Buying offices Wholesalers Piggy-backing Distributors Export houses Stockists
Direct
Agents
Licensing, Franchising
Contract manufacture
to final user via company branch offices
Wholly owned Joint overseas production venture, Consortium, Acquisition Strategic Organic growth alliances
E-commence and Internet
Exporting
Overseas production
Advantages
Concentrates production; small start possible; Lower distribution costs; overcomes trade barriers; possibly lower mnimises overheads production costs
Key issues
Exchange rates, protectionism
Political risk; partnership; managing overseas facilities; more risky
Involvement
Usually less involved, but an exporter might depend on the overseas market
Usually more involved, but overseas subsidiaries might act independently: varying levels of control and risk
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The corporate parent
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The corporate portfolio
Three value-creating roles for the corporate parent
Envisioning corporate intent, communicating the vision to stakeholders and SBU managers, and acting in accordance with it. Intervention to improve performance. Provision of services, resources and expertise.
Generic strategies
Sustaining competitive advantage
Three kinds of parent
Portfolio managers create value by applying financial discipline.They keep their own costs low.
Synergy managers pursue economies of scope through the shared use of competences and resources.
Parental developers add value by deploying their own competences to improve their SBUs' performance.
The corporate parent imposes costs, so it must create at least enough value to pay these costs. It may destroy value: Exercise of managers’ political ambitions Size and complexity can obscure corporate vision Process and hierarchy slow decisions, stunt enterprise. Page 59
6: Strategic choices
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The corporate portfolio
Generic strategies
Sustaining competitive advantage
Portfolio analysis is applicable to products, market segments and SBUs. There are four basic strategies: Build Invest for market share growth
Hold Maintain current position
Harvest Manage for profit in the short term
The BCG Matrix Market growth
High Low
Question mark Star Dog Cash cow High Low
Relative market share
Stars – build Cash cows – hold or harvest Question marks – build or harvest Dogs – divest or hold
Divest Release resources for use elsewhere
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Ashridge portfolio display Benefit (fit between SBU opportunities and parental skills etc) Low High Ballast businesses
High Heartland businesses
Feel (fit between SBU CSFs and parental skills etc)
Alien businesses
Low
Value trap businesses
Heartland businesses can benefit from the attention of the parent without risk of harm from unsuitable developments. Ballast businesses are well-understood by the parent, but need little assistance. They should bear as little central cost as possible. Value trap businesses provide good opportunities for parenting, but these opportunities do not relate to the SBU's CSFs. Alien businesses have no place in the portfolio. They need the attention of a skilled parent, but the actual parent does not have the skills and resources required to help them. This approach is based on the idea of the corporate parent as a parental developer. Page 61
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The corporate portfolio
Generic strategies
Sustaining competitive advantage
The public sector portfolio matrix The principal way of judging success in the private sector is by reference to customers. In the public sector, activities must have political support. This does not depend exclusively on the opinions of the consumers of the services provided. Ability to serve effectively High
Low
High Public sector star
Political hot box
Golden fleece
Back drawer issue
Public or political need (and therefore support for expense)
Low
A public sector star is something that the system is doing well and should not change. They are essential to the viability of the system. Political hot boxes are services that the public want, or which are mandated, but for which there are not adequate resources or competences. Golden fleeces are services that are done well but for which there is low demand. They are potential targets for cost cutting. Back drawer issues are unappreciated and have low priority for funding. They are obvious candidates for cuts, but if managers perceive them as essential, they should attempt to increase support for them and move them into the political hot box category.
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Cost leadership Aims to be the lowest cost producer in the industry as a whole
Economies of scale Use the latest production technology or cheap labour Productivity improvement Minimisation of overheads Favourable access to inputs
Focus
Generic strategies
Sustaining competitive advantage
Differentiation Aims to exploit a product perceived as unique within the industry as a whole
Aspects of cost leadership
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Aspects of differentiation – – –
Breakthrough products – radical performance advantage Improved products – superior performance at a competitive price Competitive products – unique combinations of features Brand image Special features Unique combination of value activities
Activity is restricted to a particular segment of the market. Either a cost leadership or differentiation strategy is then pursued. Such concentrated effort can be more effective, but the segment may be attacked by a larger firm. Page 63
6: Strategic choices
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The corporate portfolio
Generic strategies
Sustaining competitive advantage
Generic strategies and the five competitive forces Competitive force New entrants
Advantages Cost leadership
Disadvantages Differentiation
Cost leadership
Economies of scale raise barriers to entry
Brand loyalty and perceived uniqueness are entry barriers
Substitutes
Firm is not as vulnerable as its less cost-effective competitors to the threat of substitutes
Customer loyalty is a weapon against substitutes
Customers
Customers cannot drive down prices further than the next most efficient competitor
Customers have no comparable alternative Brand loyalty should lower price sensitivity
Suppliers
Flexibility to deal with cost increases
Higher margins can offset vulnerability to supplier price rises
Increase in input costs can reduce price advantages
Industry rivalry
Firm remains profitable when rivals go under through excessive price competition
Unique features reduce direct competition
Technological change will require capital investment, or make production cheaper for competitors Competitors learn via imitation Cost concerns ignore product design or marketing issues
Differentiation
Customers may no longer need the differentiating factor Sooner or later, customers become price sensitive
Imitation narrows differentiation
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The strategy clock
Perceived added value
High
Low
3 Hybrid – Low price plus differentiation. Cost base must be low. Can build market share or be used for market entry.
1 No frills – needs a large price-conscious segment. May be used for market entry to build volume and gain experience.
5 Focused differentiation – seeks a high price premium in return for a high degree of differentiation. 3, 4 and 5 are all variants on differentiation.
2 Low price – better value than competitors. Cost leadership needed. Price war may ensue.
Low Page 65
4 Differentiation – perceived added value either increases market share or supports price premium
6
7
6, 7 and 8 are all destined for ultimate failure.
8 Price
High 6: Strategic choices
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SUSTAINING A PRICE BASED STRATEGY
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The corporate portfolio
SUSTAINING DIFFERENTIATION
Generic strategies
Sustaining competitive advantage
LOCK-IN (Delta model)
Increase volumes or cross subsidise Secure preferred access to customers Achieved when a product becomes from another SBU or suppliers, via licensing for example, the industry standard (eg Microsoft to block potential imitators operating systems) Constantly and aggressively drive down all costs (meaning company can sustain a price advantage)
Strong branding, proprietary First mover advantage: Standard is technology or co-specialisation can all more likely to be set early in product make the cost of switching high for a lifecycle than when it is mature. customer
Engage in a price war (if company is cost leader or has extensive financial resources)
Cost advantages might be used to Standard-setter becomes perceived invest in innovation, brand as the one to follow, especially if the management or quality improvements standard is set early in the product lifecycle
Implement a ‘no frills’ strategy, for those who particularly appreciate low prices
Fierce defence tactics will often be employed
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Strategy and hypercompetition Hypercompetition A condition of constant competitive change created by frequent aggressive competitive moves. No firm can create lasting competitive advantage. Success depends on effective short-term moves.
Options
Reposition on the strategy clock
Counter-attack – undermine first mover advantage by leapfrogging; initiate product market moves
Attack barriers to entry by rapid technological advance, cross subsidy or use of economies of scale from another market, and development of new distribution methods
Small players concentrate on niches, build trade alliances and merge with others
Principles for strategy
Be unpredictable Pre-empt imitation Small moves disguise intent Send misleading signals Attacks on weakness may provoke attempts to improve
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Direction and method of growth
Strategy and market position
Success criteria
Ansoff described the four possible growth vectors in the four cells in the diagram below: the growth vector matrix. PRODUCT New Existing Existing
Market penetration Maintain or increase market share Dominate growth markets Drive out competition from mature markets Increase usage by existing customers
MARKET
New
Market development New markets for current products New geographic areas - export New package sizes New distribution channels Differential pricing to suit new segments
Product development Launch new products (using existing knowledge of customers and their needs/wants) May require new competences Forces competitors to follow suit Discourages newcomers May require investment in R&D or new production facilities Diversification Related Vertical Forward
Horizontal
Unrelated (conglomerate)
Backward
New competences will be required
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Mergers and acquisitions
Organic growth The development of internal resources Supports learning and is supported by it Consistent culture and management style Provides economies of scale Ease of control However: Can be slow Not good for dealing with barriers to entry
Cooperative methods Include consortia, joint ventures, licensing, franchising and sub-contracting. These methods can enhance access to resources of all kinds, achieve economies of scale, achieve synergy, and enhance competences but stop short of a merger or takeover. Page 69
Can overcome barriers to entry Can spread risk Can defend against predators Provide access to a variety of resources: products; managers; suppliers; production facilities; technology and skills; distribution facilities; cash; tax losses
However, many acquisitions fail to enhance shareholder value.
Cost: the acquisition price is often too high Customers may be disturbed by changes Cultural problems, especially in management Top management egos can warp judgement Professional advisers drive the market 6: Strategic choices
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Direction and method of growth
Strategy and market position
Success criteria
Joint ventures
Franchises
Two or more organisations join forces, and each has a share in the equity and management of the business.
Allow a business to expand with less capital expenditure than would otherwise be necessary. Franchisees pay lump sum to enter the franchise, and also bear some of the running costs.
Share costs - capital outlay is shared Synergies - combining expertise in different areas Overseas JVs provide local knowledge, quickly Participating enterprises benefit from all sources of profit But:
Reduces capital requirements Quicker expansion than opening new companyowned facilities Specialisation - franchisee and franchiser both concentrate on their own areas Reduces head office and management costs But:
Profits are shared Conflicts over interest between different parties Disagreements over profit share splits, management and strategy Risk of one partner withdrawing
Profits are shared Issues re control over franchisees, and potential for conflict Risk to brand/reputation if franchisee provides inferior goods/services
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Direction and method of growth
Strategy and market position
Success criteria
Strategies may be based upon market position PIMS research showed a strong link between market share and profitability, probably dervived from scale economies
Market challengers
Market leaders Aims
Expand total market Protect current market share Expand market share (eg increased promotion, aggrerssive pricing)
Market followers Accept status quo, compete in suitable segments, control costs and grow with market. Beware of predators.
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Aim
Build market share using attack strategies outlined in Chapter 3 and by attacking smaller rivals
Market nichers Specialise in a niche with adequate size and growth potential. Multiple niching spreads risk.
6: Strategic choices
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Direction and method of growth
Strategies are evaluated according to:
1 Their suitability to the firm’s strategic situation
2
This might be analysed using life cycle analysis; business profile analysis or strategy screening. Internal TOWS strategies are inherently suitable. factors Their feasibility in terms of resources and competences Resource deployment analysis, and financial approaches such as funds flow analysis and breakeven analysis would be appropriate tools to access feasibility.
3
Strategy and market position
Success criteria
External factors SO
ST
Use strengths to Use strengths to maximise opportunities minimise threats WO
WT
Minimise weaknesses Minimise weaknesses by taking advantage of and avoid threats opportunities
TOWS Matrix
Their acceptability to key stakeholder groups Depends upon the view of each stakeholder! Financial considerations (return on investment, cash flow, cost benefit analysis) are generally important, but don’t forget issues such as government legislation or corporate social responsibility. Also, risks must be carefully assessed.
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7: Organising for success
Topic List Challenges and concepts Types of structure Processes Relationships Collaborative organisational structures Stereotypical configurations Configuration and strategy
The modern business environment has seen the emergence of new structural ideas and designs, and traditional assumptions about organisation structure are being replaced with more flexible formats. The need to exploit knowledge has made organisation structures, processes and relationships vital ingredients in strategic success.
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Types of structure
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Processes
Relationships
Collaborative organisational structures
An organisation’s configuration consists of the structures, process and relationships through which it operates.
3 major challenges 1 2 3
Rapid environmental change and uncertainty require organisations to be flexible New global communication and information systems must be accommodated The strategic importance of knowledge means that there must be effective processes and relationships for linking those who have knowledge and those who need it.
Processes and relationships will have varying degrees of formality and informality. The formal and informal aspects must work together. Also, processes and relationships are highly interdependent and must work intimately and consistently together.
Formal structure shows: Who is responsible for what Who communicates with whom At the upper levels, the skills that are valued, and the role of knowledge and skill
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Types of structure
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Processes
Relationships
Collaborative organisational structures
Self-contained organisational structures: historically most organisations have tended to be 'self contained' as they are distinct from external groups (customers, competitors and suppliers). Johnson, Scholes and Whittington identify review seven basic structural types: 1
Functional
According to the type of work – logical but does not reflect value creating processes
2
Multidivisional
Semi-autonomous divisions that are then differentiated eg by-product – brings problems of balkanisation and potential value creation.
3
Holding company
Divisions are separate legal entities
4
Matrix
Co-ordination across functional lines – allows flexibility, but may cause confusion (dual authority)
5
Transnational
National units operate independently, but share capabilities – some have a specialisation that supports the whole organisation
6
Team-based
Use of cross functional teams to operate a specific process area
7
Project
Similar to team-based, but with a finite life, since projects by definition have a finite life
No single model of organisation is suitable for all purposes. Managers must choose a structure in the light of which challenges they regard as most pressing. Page 75
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Processes
Relationships
Collaborative organisational structures
Control processes determine how organisations function. They may be analysed according to whether they deal with INPUTS or OUTPUTS, and whether they involve DIRECT MANAGEMENT ACTION or more INDIRECT effects. For example, balanced scorecards are direct output-based processes.
Types of control process Inputs Direct
Supervision – can be used for strategic control and in a crisis Planning processes – budgetary control and standardisation schemes such as ISO 9000: 2000 work best
Indirect
Cultural processes – can be very effective in complex and dynamic environments. Depend on good training. Self-control – when combined with motivation, can be very effective in exploiting knowledge. Depend on appropriate supportive leadership.
Outputs Performance targets – useful in large organisations when combined with autonomy, and in heavily regulated activities such as privatised utilities. Balanced scorecard – emphasises need for broad range of KPIs. See below. Internal markets – useful in complex and dynamic markets. However, may encourage dysfunctional competition, timeconsuming bargaining and increased bureaucracy to monitor effects. May also destroy collaborative culture.
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Traditional accounting measures are inadequate for assessing overall progress. Other matters must be considered, especially as financial reporting is heavily retrospective in focus. The balanced scorecard covers most of the angles with its four perspectives. Note that individual measures are company specific.
Customer perspective
Internal business perspective
‘How do customers see us?’ This perspective concentrates on customers’ concern with price, quality, performance and service. Example measures would be percentage of on-time deliveries and customer rejection rates.
‘What business processes must we excel at to achieve financial and customer objectives? Control measures will focus on core competences, skills, productivity and cost, for example.
Innovation and learning perspective
Financial perspective
‘Can we continue to improve and create value?’ This perspective is forward looking and concentrates on what the company must do to satisfy future needs. Performance measures include time-to-market for new products and percentage of revenue from them. Page 77
‘How do we create value for shareholders?’ This is the traditional reporting perspective, but must not be overlooked. Market share and sales growth are included here. Modern measures like value-added and shareholder value analysis should be included. 7: Organising for success
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Processes
Relationships
Collaborative organisational structures
Organisational relationships are categorised as internal or external. Degree of centralisation is an important issue in internal relationships.
Advantages of centralisation
Advantages of decentralisation
Allows easy exercise of firm control and strong leadership
Policy and procedure are easily standardised
Internal disputes may be settled more easily, though political activity may still thrive
Concentration avoids the increased overheads that duplication of facilities may produce
Reduces the workload at the strategic apex Utilises expertise and local knowledge Enhances job satisfaction for subordinates Promotes faster response to changing conditions and enhances flexibility Grooms managers for promotion
Goold and Campbell identify three types of strategic decision making and control. 1 Strategic planners have a small number of core businesses. Planning and control are centralised. 2 Strategic controllers tend to be diversified. The strategic apex provides objectives and guidelines, but leaves planning initiatives to business unit managers. 3 Financial controllers are more interested in profit targets than business unit strategy. Use financial performance for control.
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External relationships are increasingly co-operative rather than adversial.
Boundary-less organisation structures involve the organisation collaborating with outside parties to make it more flexible during times of change. Boundary-less structures include: Hollow organisations Modular organisations Network Virtual Shamrock organisation Alliances Page 79
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Processes
Relationships
Collaborative organisational structures
Hollow organisation structure Similar to a Network organisation Outsourcing is central to the creation of a hollow organisation Non-core processes are outsourced (eg Payroll) to specialist providers Entity now focuses on core value adding activities Outsourcing makes the organisation a ‘hollowed out’ enitity Modular organisation structure Production processes are outsourced to specialist providers The organisation will assemble the outsourced components in-house to produce a final product. Allows for cost efficiencies
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Outsourcing has made the concept of the boundary-less organisation possible. Outsourcing involves the contracting out of certain internal functions to a third party.
Offshoring is a form of outsourcing which involves an external party in a different country providing an organisation with a particular process.
Advantages of offshoring
Cost savings Focus on core activities Improve capability Skills Flexibility
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Disadvantages of offshoring Quality issues Public perceptions Loss of control
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Processes
Relationships
Collaborative organisational structures
Shared servicing is an alternative to outsourcing. A shared service centre brings together certain functions within an organisation. IT support functions are commonly combined to provide services to the entire organisation, not just one department. Advantages of shared service centres Reduced headcount Reduction in overhead costs Facilitates knowledge sharing Standardised approaches
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Other forms of boundary-less organisation structure
Alliances
Network organisations
Minimum effective scale may require pooling of resources. Complex organisations such as alliances, partnerships and consortia result. Co-operation may be based on any value activity.
Network structure may exist within an organisation in the form of a loose array of informal, fluid relationships; this approach can achieve innovative response to change.
Strategic outsourcing can lead to external networks and virtual teams.This creates interdependence. Competitors may collaborate on non-core competence matters such as R&D and distribution.
Shamrock organisation (Handy) Contingent workforce Often part time/temp – no career track – routine work – engaged as required
Consumers eg buyers of DIY furniture
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The virtual organisation
Geographically dispersed organisational components Information technology is central to the production process Flexible structure Collaborative culture 7: Organising for success
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Processes
Relationships
Collaborative organisational structures
User contribution systems Organisations have turned to user contribution systems as a means of extracting and collating customer contributions. New technologies such as Web 2.0 have enabled the widespread use of user contribution systems. Buchanan and Huczynski highlight 6 motivations for individuals to interact via user contribution systems: By-product
Reputation
Practical solutions
Self-expression
Social rewards
Altruism
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Crowdsourcing involves obtaining information from a large group of people. Organisations can use this information to help solve commercial problems.
Drawbacks of crowdsourcing Lack of credibility Collaborators do not have to collaborate
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Stereotypical configurations
Configuration and strategy
Mintzberg’s view
Ancillary services eg legal, PR
t ur tru c os hn Te c
Standardise work, work processes, outputs, skills eg quantity assurance staff
e
Strategic Seeks control, responsible for strategy and boundary management Apex
Support Staff
Middle Line administer and implement
Operating Core Directly involved in operations: seek autonomy
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Key part
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Environment
Possible characteristics
Simple
Direct supervision Strategic apex
Simple/dynamic (even Small, young, centralised, hostile) personality-driven. Crisis of leadership
Machine bureaucracy
Standardised work processes
Techno-structure
Simple/stable
Old, large, rule bound, specialised
Professional bureaucracy
Standardised skills
Operating core
Complex/stable
Decentralised, emphasis on training
Divisional form
Standardised outputs
Middle line
Varies, each division is shielded to a degree
Old, large, divisions are quasi autonomous, decentralised, bureaucratic
Adhocracy
Mutual adjustment Support staff
Complex/ dynamic
High automated, ‘organic’
Mintzberg mentions one other co-ordinating factor: mission. A missionary organisation is one welded together by ideology or culture. It features simple systems and network relationships in team structures. It works well in a simple and static environment. Page 87
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Stereotypical configurations
Chandler believed that structure is determined by strategy. Johnson, Scholes and Whittington suggest that there are few practical combinations of structures, processes and relationships. The ones that work produce reinforcing cycles of behaviour that make them cohesive, robust and difficult to change. They look for opportunities that suit their style. Change is thus dangerous since it disrupts the reinforcing cycles, leading to worsening performance until a new cycle is established.
Configuration and strategy
Any structure will have problems of optimisation, since all features have advantages and disadvantages. For example, empowerment can promote innovation but may lead to loss of control.
Possible approaches to optimisation
Divide the organisation and use a different approach in each part Combine features in unusual ways Reorganise often
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8: Managing strategic change
Topic List Situation analysis for change Styles of change management Change management roles Change management levers Pitfalls of change management
Strategies can be expected to change and evolve over time because of environmental changes and developments. Certain factors will drive change, and expecting and controlling such factors is an important part of strategic management.
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Styles of change management
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Change management roles
Change management levers
Pitfalls of change management
The management of change starts with an understanding of three main considerations.
1
The type of change required – its scope and nature Scope of change Nature of Incremental change 'Big bang'
2
Realignment
Transformation
Adaptation
Evolution
Reconstruction
Revolution
The wider context of the change, in large part cultural considerations Time available Capacity - Availability of resources, especially finance, IS/IT and management effort
3
Features to preserve
Workforce readiness to change, or resistence to change
Organisational diversity
Power to effect change
Capability to manage change – largely depends on experience
Scope of change needed
Forces facilitating and blocking change – use of force field analysis
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Styles of change management
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Change management roles
Change management levers
Pitfalls of change management
There are five main styles of change management: Style
Characterised by
Appropriate to
1
Education and communication
Persuasion
Incremental change, willing staff
2
Collaboration and participation Involving those affected
Incremental change, supportive culture
3
Intervention
Change agents
Incremental change
4
Direction
5
Coercion/edict
Managerial authority, probability Transformation of resistance Use of power to impose change Times of crisis
Different approaches may be appropriate to different stakeholders. Normal management practice will also affect the style used. It may be advantageous to use more than one style. Page 91
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Styles of change management
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Change management roles
Change management levers
Pitfalls of change management
A change agent is an individual or group that helps to bring about strategic change in an organisation.
Johnson, Scholes and Whittington examine change agency by considering three distinct groups:
1
Strategic leaders
Five approaches to strategic leadership:
2
Strategic analysis and design focus Human assets development focus Expertise as source of competitive advantage focus Control by procedures and performance monitoring Change as continuous process – emphasis on communication and monitoring
Middle management Providers of advice; translation of strategy at local level; implementation and control
3
Outsiders Bringing a fresh point of view, such as a new chief executive or the use of consultants
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Styles of change management
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Change management roles
Change management levers
Pitfalls of change management
A turnaround strategy is required when a business is in terminal decline. It has its own change management techniques: Crisis stabilisation – management changes – communication with stakeholders – attention to target markets – concentration of effort – financial restructuring – prioritisation In other circumstances, change management levers relate to the cultural web.
Change management levers Challenging the paradigm
move away from entrenched habits
Changing routines
discard old ways of doing things
Use of symbolic processes
introduce new rituals and systems
Power and politics
build a power base, overcome resistance and achieve compliance
Communication and monitoring
explain the need for change, what change intends to achieve
Tactics
careful timing, use of ‘quick wins’, handling job losses - with care.
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Styles of change management
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Change management roles
Change management levers
Pitfalls of change management
Change programmes may be subverted and lead to unintended consequences. This has four implications for change management. Monitoring and control are vital. The existing culture must be understood. The organisation's people should be involved in the change process. The extent of the challenge must be recognised.
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9: Business process change
Topic List The background to process change The business change lifecycle/POPIT The process-strategy matrix A process redesign methodology Process commoditisation
This chapter examines how processes can contribute towards the delivery of strategy, and how they might be made more effective at doing this.
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The business change lifecycle/POPIT
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The processstrategy matrix
A process redesign methodology
Process commoditisation
Business processes and business process re-engineering play vital roles in enabling an organisation to implement its strategies successfully. Change management
Value chains
Supply chain management
Project management Business Process Re-engineering
Information technology (Software packages, eg ERP)
Information technology (e-business opportunities)
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The organisation Inputs People Materials Money Information
Outputs Goods Services Profits Taxes
The organisation is an open system. It interacts with its environment and is itself made up of processes that interact both within its boundary and across it.The efficiency of these processes (or subsystems) is always a major target for improvement. Business Process Reengineering ‘Fundamental rethink and radical redesign of business processes to achieve dramatic improvements’. Workflow systems and Enterprise Resource Planning Automate existing processes – no specific redesign Software engineering approach Emphasises system, efficiency and consistency. Attempts to substitute for human intervention. Page 97
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The Rummler-Brache methodology Processes must be seen as cross-functional wholes. 9 areas of concern, defined by 3 structual levels and three perspectives. Goals and measures of achievement Design and implementation
Organisation as a whole Process
Management
Job Harmon’s approach Improvement projects should be tied to specific corporate goals, or else focus will be lost. There must by ‘buy-in’ by managers and staffs. This requires change management and alignment of incentives. IT is vital: IT specialists must take a strategic view; line managers must understand IT.
Terminology Process improvement is a tactical, incremental technique. Process re-engineering is for strategic, fundamental change. Process redesign is for intermediate scale significant change. 9: Business process change
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The business change lifecycle/POPIT
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The processstrategy matrix
A process redesign methodology
Process commoditisation
The business change lifecycle provides a framework for assessing the key stages involved in undertaking a business change project. Alignment
Realisation
Implementation
Definition
Benefits Management
Design
The lifecycle provides a broad umbrella framework from which different process change methodologies can operate.
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The POPIT model (four view model) focuses on four interrelated areas that require consideration if a business change project is to be a success.
Organisation
Information Technology People
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Processes
9: Business process change
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The processstrategy matrix
A process redesign methodology
Process commoditisation
This analyses processes in terms of their complexity on one axis and their strategic importance on the other. High
Complex and dynamic processes but not part of company’s core competences: hard to automate, so outsource
Complex decision, design or negotiation processes
Many complex rules; expertise required
Process complexity and dynamics
Some rules present
Simple procedure or algorithm
Complex, dynamic, high value processes which generate competitive advantages; careful process improvement, focusing on people, their skills and their interactions
Examples: advertising, staff counselling
Examples: product development
Simple, commodity-like processed: automate with off-the-shelf systems or outsource
Simple but important automate to improve efficiency. Use six sigmabased improvements.
Examples: payroll accounting, credit card approval
Examples: sales order processing
Low Strategic Importance Low
Essential, but add little value
High
Vital for success, high added value
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The business change lifecycle/POPIT
Harman describes a five phase methodology for process redesign and the organisational setting required for it to work. The Setting
The organisation should be structured around its systems and processes rather than functionally The process architecture committee reports to the strategic apex and is responsible for the effectiveness of processes overall The process redesign committee is set up to oversee a redesign project and to achieve ‘buy in’. It has representatives from all the departments involved The project sponsor is the manager of the process being redesigned The project facilitator is the project manager and is neutral between groups.
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1 2
3 4
5
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The processstrategy matrix
A process redesign methodology
Process commoditisation
The Methodology Planning Project charter defines goals, scope and roles. Project redesign team nominated. Detailed project plan produced including time and cost budgets. Analysing the existing process May not be needed if: Full system documentation already exists There is no existing process Radical change makes it unnecessary Requires full process documentation, including goals, inputs, activities, outputs, performance, incentives and how the process is managed. Project goals and assumptions are then re-examined. Designing the new process Possible solutions are considered and the best chosen. May require simulation of proposals. Must be fully documented. Must obtain management approval. Development Functional and resource implications followed through: training, IT, job specifications designed. Overall change to a process structure may be made at this stage: this is a project in itself. Transition Depends on change management. Merges into routine monitoring. 9: Business process change
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The business change lifecycle/POPIT
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The processstrategy matrix
A process redesign methodology
Process commoditisation
Outsourcing Reduces the workload on managers, enabling concentration on core competences Exploits suppliers’ economies of scale, knowledge and experience May be a core competence itself Getting the best from outsourcing depends on relationship management Specification of services and standards Performance measurement Ability to adjust elsewhere if standards not achieved Davenport says adoption of process standards (eg quality standards) will enable more processes to be outsourced. This implies:
Process costs fall Offshoring of jobs accelerates Competition basis changes Process quality improves
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Advantages and disadvantages of outsourcing Advantages
Disadvantages
Cost saving; exploit contractor’s economies of scale
Finding a single supplier who can manage complex processes in full
Increase effectiveness if supplier has higher levels of expertise
Confidentiality issues may prevent firms outsourcing whole processes
Focus on core activities/competencies Can deliver change more quickly than reorganising in-house
Potential loss of control especially re quality Tied to inflexible, long term contracts Dependent on suppliers (supplier bargaining power)
Creation of customer/contractor relationship formalises cost control
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Notes
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10: Improving processes
Topic List Process redesign patterns Standard software packages Establishing software requirements Assessing software packages Selecting software packages
This chapter considers the practical detail behind process change, for example, identifying the basic redesign patterns which can lead to process improvement. IT is important in process improvement, and this chapter also examines software selection (a known interest of the P3 examiner).
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Process redesign patterns
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Standard software packages
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Establishing software requirements
Assessing software packages
Selecting software packages
A process redesign pattern is a general approach to redesigning processes for their improvement. Harmon describes four basic redesign patterns:
1
Re-engineering
Starts with a clean sheet of paper Fundamental rethinking Radical and large scale improvements possible Highly disruptive High risk of failure
3
Value added analysis
Eliminates activities that do not add value from point of view of customer Activities may be value adding, value enabling (essential preliminaries such as preparation and set-up) or non-value adding (eg inspection or reworking errors). Similar results as simplification.
2
Simplification
Eliminates redundancy/duplication Identify, model and challenge all systems Requires judgement and flexibility to deal with subtlety and complexity. Improvements vary in scale
4
Gaps and disconnects
Targets failures of communication between departments/functions using 3 levels defined by Rummler and Brache for process redesign (organisation as a whole; process; job). This extends study to management activities of control and monitoring at the level of the organisation as a whole.
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Standard software packages
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Establishing software requirements
Cheaper – development costs spread by vendor Time savings Quality guaranteed by vendor Documentation and training available Maintenance and support available Comprehensive package evaluation possible before purchase
Selecting software packages
Disadvantages
Advantages
Assessing software packages
Property rights reside with supplier, who controls development and support Supplier may go out of business Competitive advantage cannot be achieved if package available to competitors Inadequate performance or restricted functionality a problem as not ‘bespoke’ Changing requirements will not be catered for
ERP systems are based on limited, standardised modules. This means that the organisation must adapt to the standard system rather than designing its own most appropriate and efficient processes. However, the alternative (adapting a standard package to local requirements) destroys the advantages of purchasing the standard package and introduces further complications. Tailoring ERP software to fit an existing system is generally a mistake. Page 107
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Assessing software packages
Establishing software requirements
Selecting software packages
There are seven techniques for collecting information at the start of an IS project. Research techniques can be analysed as good (G), very good (VG) or not good (NG) in how they deal with problems associated with change aversion, vagueness in responses, how much existing systems are ‘taken for granted’, tacit knowledge, new systems, or lack of analyst experience. Change aversion
Vagueness
Taken for granted
Tacit knowledge
New system
Inexperience
Interview
G
G
G
NG
G
G
Observation
NG
G
VG
G
NG
VG
Protocol analysis
NG
NG
VG
VG
G
VG
Document analysis
G
NG
G
G
NG
VG
Workshop
VG
NG
VG
NG
VG
G
Prototype
VG
NG
VG
G
VG
G
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Establishing software requirements
Assessing software packages
Selecting software packages
Skidmore & Eva: Software packages maybe assessed against ten high-level requirement categories, each of which is made up of more detailed specific requirements. Not all high-level categories will receive the same weighting. Imperatives are non-negotiable, absolute requirements and must be established very early on in the project.
1 2
3 4 5
Typical Typical Weighting Weighting 6 Supplier social responsibility Functional requirements – support 2 30 business or operational functions 10 7 Initial implementation requirements – relates 10 Non-functional requirements – still to installation; file creation and conversion; setup; essential, but not related to business and training functionality eg legal compliance 2 8 Operability requirements – documentation, 10 Technical requirements – IT details and support, upgrades, legal protection (source code preferences – may include imperatives in escrow) Design requirements – mostly relate to 5 – will almost always be 9 Cost constraints 20 system flexibility imperatives but time and cost trade-offs against 15 Supplier stability requirements – to 2 other issues may be ensure continuance of technical support 10 Time constraints considered – includes financial position, reputation, insurance, legal status, quality status
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Establishing software requirements
Skidmore and Eva propose a five phase selection process
1 Obtaining potential suppliers
Admin Package requirements Project Evaluation procedures Client project management procedures
3
Second pass selection
Objective reassessment of suppliers’ claims using specific test scenarios. Suppliers may perform against a script or client staff may use demonstration packages
Client Response format
Visits to reference sites to see package in operation Financial investigation of suppliers Implementation
Long-tem relationships Client dependency on vendor can be mitigated
First pass selection
2
4 5
Selecting software packages
Aim is to produce a short list of, say, 3 candidates. Based on information in tenders assessed against the 10 requirement categories.
Identify potential suppliers Advertise general system requirements – may be legally required in public sector Research market – trade directories, internet Allow for early wastage Invitation to tender A complex document with details of –
Assessing software packages
Maintain good relationship Escrow agreement Continuous evaluation for early warning of problems Contingency plan to move elsewhere
Need for testing should be minimal; standard package documentation likewise; though attention to both may be needed to integrate interfaces. Training in the use of the package (provided by vendor) and wider effects (provided by client). File creation and conversion required.
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11: E-business Topic List Principles of e-business Organisations and their customers Hardware and software infrastructure IT controls, continuity planning and disaster recovery IT and strategy Supply chain management E-procurement
E-business is relatively new, but is a rapidly expanding and very important area of strategy building for many organisations.
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Hardware and software infrastructure
IT controls, continuity planning and disaster recovery
IT and strategy
E-business is ‘the transformation of key business processes through the use of Internet technologies’ (IBM). If a financial transaction is involved, the process becomes e-commerce. (E-business and e-commerce are often confused. Note the distinction: a transaction must be involved to constitute e-commerce.) E-business features
Adopting e-business
Purposes Increase revenues Improve channel efficiently (eg improved communication) Control and automate operations Reduce costs Gain visibility E-business adoption pyramid
Challenges traditional business models by replacing traditional intermediaries Global markets accessible to small companies New economics of information - much available free of charge Speed of access, communications and transactions Customised product offerings to precisely defined target segments Emergence of new, web-based intermediaries Work becomes independent of location New business partnerships
Mature capability E-HR Web-conferencing E-collaboration E-invoicing E-procurement Document management Web portals Company intranet Email, internet, company website, remote working Initial capability
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Benefits of e-business
Cost reduction in procurement and headcount needed to handle customers Capability – increase penetration in new countries; help reduce inventory levels held Communication – improved, more interactive communication with customers Control – better monitoring and control Customer service enhanced – basic enquiries can be dealt with via a website Competitive advantage – will be dependent on competitors’ use of e-commerce.
Barriers to e-business Smaller businesses may regard e-business as irrelevant to them for reasons of size, cost of implementation or typical customers not being users. Other barriers Critical mass of internet users required – this will vary by country Lack of ability or interest in credit transactions Different languages and cultural attitudes (eg to risk) will affect willingness to trade online Security concerns Skills required/training needs Page 113
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Hardware and software infrastructure
Exchange initiated by
Varieties of e-commerce
Business
Consumer
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IT controls, continuity planning and disaster recovery
IT and strategy
Delivery by Business
Consumer
B2B Business models
B2C Business models
eg bpp.com
eg Amazon.com
C2B Business models
C2C Business Models
eg Priceline.com
eg eBay.com
Changes to channel structures Disintermediation – direct selling instead of using distributors, wholesalers or brokers, ie online purchases direct from suppliers Reintermediation – new intermediaries eg Amazon, Expedia Countermediation – the creation of a new online intermediary by an established company eg Opodo
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Generic models (Rappa)
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Classification by characteristics
Brokerage
Bring buyers and sellers together and facilitate transactions
Value proposition
How the customer’s need is fulfilled
Advertising
Website services supported by advertising (eg banner ads)
Revenue
Infomediary
Collecting and selling purchaser information about consumers and their purchasing habits
How revenue arises (eg fee, advertising, subscription) Planned market space (ie products and services offered) Nature of existing competition
Market opportunity Competitive environment
Merchant
Direct selling by retailers
Competitive advantage Superior offering vs competitors
Manufacturer
Direct selling by producers
Affiliate
Financial incentives to affiliate partners
Community
Users contribute to a website
Market strategy Organisational development Management team
Subscription
Users pay a fee for access to a site
Utility
Metered usage as pay-as-you go
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The marketing plan How the work required will be accomplished Nature of the group responsible for making the business model work
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Hardware and software infrastructure
IT controls, continuity planning and disaster recovery
IT and strategy
E-business architecture
Infrastructure
Players
E-business services – Application layer
E-commerce software systems; Customer Relationship Management systems; Performance enhancement; Supply chain management; data mining and content management systems
Microsoft, IBM, Ariba, BroadVision, Peoplesoft, Siebel, Akamai
Systems software layer
Web browser, operating systems; server software and Microsoft, Sun, Linux standards; networking software and database Oracle, Sybase, IBM, management systems; encryption software Microsoft,Verisign
Transport or network layer
Web servers. Physical network – routers and transport standards (TCP/IP)
Storage/physical layer
Permanent magnetic storage on web servers. Optical backup. Temporary storage in RAM
Content and data layer
Web content for Internet, intranet and extranet sites. PayPal, CyberCash, Customers' data. Transactions data. Payment Microsoft, Real Networks, systems.Streaming media solutions. Hosting services Apple, IBM
IBM, Dell, Sun, Cisco, Lucent
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Internet technology TCP/IP. Internet technology is based on the Transmission Control Protocol and Internet Protocol, (TCP/IP) which allowed several smaller, predecessor networks running on different software to be linked. Client/server architecture. Client computers access services from server computers. Each computer has a unique IP address. World Wide Web and Hypertext. The world wide web is a system of interlinked computer-stored documents. The links are provided by hypertext address hyper links. Alternative Internet access technologies Interactive digital TV (IDTV) allows interactions via a cable TV link or phone line for terrestrial or satellite broadcast. Mobile phones can be used for m-commerce and web access using Wireless Application Protocol (WAP), General Packet Radio Service (GPRS) and 4th generation (4G) technology. Wireless Fidelity (WiFi) Hotspots also allow wireless connection to the Internet, largely for notebook computers.
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Protocol stacks. Interaction between computers is carried on at several levels, from the physical wiring, through the processes of transferring and checking data to the final presentation to the user. The Open Systems Interconnection (OSI) standard uses 7 layers; these can be linked to the 4 layers of the TCP/IP protocol stack. Intranets allow email and information sharing within the protection of a firewall and are used for a wide range of organisational purposes. Extranets are web-based extensions to intranets that provide accessibility to external users outside the firewall. Security is a major issue and external users must have usernames and passwords. Extranets are the basis for many closely linked business partnerships and network organisations; they allow rapid business transactions such as looking at a supplier's product catalogue database and making an order. 11: E-business
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Hardware and software infrastructure
IT controls, continuity planning and disaster recovery
IT and strategy
IT controls For an organisation's IT assets to operate effectively adequate control measures must be put in place. Controls are needed to prevent
Four types of control
Theft
Physical access controls
Fraud
Logical access controls
Human error
Operational controls Data input controls
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Continuity planning is focused on ensuring the survival of an organisation and its operations from both internal weaknesses and external threats. Disaster recovery is part of continuity planning. It is focused on the continuation of an organisation's IT infrastructure in the event of a disaster occurring.
Causes of disasters
A good disaster recovery plan should provide for
Fire and floods
Standby procedures
Hackers
Recovery procedures
IT systems failure
Personnel management
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Hardware and software infrastructure
IT controls, continuity planning and disaster recovery
IT and strategy
Contents of a disaster recovery plan Defines staff responsibilities Priorities Back-up and standby arrangements Communication with staff Public relations Risk assessment Hardware duplication allows IT systems to function in cases of a systems breakdown.
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Hardware and software infrastructure
IT controls, continuity planning and disaster recovery
IT and strategy
The Internet has the capacity to transform many businesses via the introduction of new technology and skills and, eventually, the re-positioning of the offering to fit the new market conditions. Organisations can visualise the necessary changes at three interconnected levels. Level 1 – The simple introduction of new technology to connect electronically with employees, customers and suppliers (eg through an intranet, extranet or website) Level 2 – Re-organisation of the workforce, processes, systems and strategy in order to make best use of the new technology Level 3 – Re-positioning of the organisation to fit it into the emerging e-economy A strategy for e-commerce should be considered at the highest level of management, and based on the standard criteria for strategic choice: Suitability. For most companies, e-commerce will be a supplement to more traditional operations, with the website forming a supplementary medium for communication and sales. The marketing mix must remain internally consistent so that the website and associated processes send the same messages as the traditional operation. Acceptability. The e-commerce strategy must be acceptable to important stakeholders. Distributors are particularly important here. Feasibility. Feasibility is a matter of resources. The fundamental resource is cash, but the availability of the skilled labour needed to establish and administer a website will be crucial to the e-commerce strategy. Objectives, costs, benefits and budgets must be considered, and a coherent position established. Page 121
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Hardware and software infrastructure
IT controls, continuity planning and disaster recovery
IT and strategy
The e-business strategy process There is a 2-way relationship between corporate strategy and e-business strategy. E-business strategy both supports and influences overall corporate strategy. Differences between traditional strategy and e-business strategy Traditional business strategy Planning horizons Predictability and long-term execution plans Process models Prescriptive strategy: the three elements (analysis, development and implementation) are linked together sequentially Planning cycles One time development effort
E-business strategy Adaptability and responsiveness within a short time period Emergent strategy: the distinction between the three elements may be less clear and they are interrelated
Power base
Iterative strategic development because the pace of change is rapid Positional power and strength in the market place Success based on manipulation of critical information
Core focus
Production and factory goods orientation
Customer orientation
Strategy is developed by continuous planning with feedback (Kalakota and Robinson) 1
Knowledge building and capacity evaluation
3
E-business blueprint – detailed plan for implementation
2
Comprehensive e-business design (address customer needs)
4
Application development and deployment
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Stages of e-commerce development (Rao et al) Stage 1
Stage 2
Stage 3
Stage 4
Presence
Portals
Transaction integration
Company integration
Content Window to the Web No integration E-mail
Profiles 2-way communications E-mail Order placing Cookies No on-line financial transactions
B2B/B2C B2B Communities Full integration E-marketplaces E-business Auctions Uses e-commerce systems to manage CRM and supply 3rd party emarketplaces chain Low-level collaboration Value chain integration On-line financial transactions High-level collaboration
Such models can help management to understand the actions and resources required in their organisation, since these very from stage to stage. They can also assist overall planning and control of development. Page 123
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Supply chain management
Traditional: ‘push model’
Long term sales forecasts drive production and inventory holding Production pushed onto distributors using sales promotions Unresponsive to demand despite buffer inventories ‘Bullwhip effect’ - unco-ordinated amplification of minor feedback signals leads to wide variation in production and inventory levels, potential obsolescence
E-procurement
E-commerce: ‘pull model’
Demand drives production and inventory holding Emphasis on response to customer needs and preferences; responsive to changing demand Lower inventories; higher service levels Reduced ‘bullwhip effect’: reduced obsolescence IS enhances responsiveness and makes system practical by providing fast and accurate information flows
IS and the value chain
Inbound logistics: MRP, ERP, JIT Operations: MRP, ERP, CAD/CAM, CIM Outbound logistics: inventory control, delivery routing Marketing & sales: EPOS, website sales, CRM Service: CRM, work scheduling
Procurement:EDI, JIT, ERP Technology development: CAD, simulation HRM: employee records, skills database Potential value improvements: Improved links both internal and external Improved information flows Cost reduction: automation, re-engeneering
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Taking advantage of IT (Porter and Millar)
Identify and rank competitive advantage opportunities for IT eg reduce cost, enhance differentiation, improve links between activities.
4
Investigate how IT can spawn new businesses eg exploitation of new information categories
5
Develop a plan to exploit IT. This will have wide organisational implications.
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High
IT can enhance efficiency of operation
IT can enhance delivery of product
High
3
Low
Sophisticated IT needed for delivery
Determine role of IT in industry structure. Radical change may be possible.
Oil refining
Banking, Airlines
Low
2
Information content of the product
Less sophistication needed
Assess information intensity in products and processes. High level indicates potential for IT.
Information content of the value chain
1
Information intensity matrix
Cement
Fashion
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Supply chain management
3 approaches to supply chain integration 1
Vertical integration: the flow of goods is through a single integrated organisation
2
Vertical disintegration: economies of scale and diseconomies of scope break the chain into distinct pieces. These pieces must be co-ordinated.
3
Virtual integration: the virtual organisation integrates all functions including core operations so that separate organisations operate as one.
E-procurement
Increased pressure for supply chain responsiveness
Increased competition arising from easier market entry Increased volumes and speeds of data flow More demanding customer requirements Threat of disintermediation at all stages of the supply chain
Two interrelated forms of integration at tactical (operational) level:
Forward physical flow of goods between suppliers, manufacturers and customers
Backward flow of information and co-ordination of data
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Supply chain management
E-procurement
Benefits of e-procurement Cost reduction
Might include process efficiencies, reduction in the actual cost of goods and services, and reduced purchasing agent overheads
Reduced inventory levels
Knowing product numbers, bid prices and contact points can help businesses close a deal while other suppliers are struggling to gather their relevant data
Control
The ability to control parts inventories more effectively
Wider choice of supplier
In theory, resources can be sourced from suppliers anywhere in the world, perhaps at much lower prices than could be obtained if the organisation only considered local suppliers
Improved manufacturing cycles
Moving to e-sourcing speeds up the sourcing process dramatically but the increased efficiency and speed can also put the rest of a supply chain in chaos if it is not prepared to step up its performance to meet the increased speed in the purchasing link of the chain
Intangible benefits
Staff are able to concentrate on their prime function and there is financial transparency and accountability
Benefits to suppliers Reduction in ordering and processing costs, reduced paperwork, improved cash flow and reduced cost of credit control
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Supply chain management
E-procurement
Risks of e-procurement
Control over potential for unauthorised purchases; can suppliers deliver the required quality? Organisational risk that processes do not work or users do not adapt to them Data security issues: access, storage, protection, back-up. Management may lose spending control Supply chain needs to be able to operate much more quickly else it could destabilise the system Methods of e-procurement
Procurement websites protected by password and username Prices may be set, or bids may be invited. Transactions may be completed by periodic billing. Paperless purchase and payment system may be provided by purchasing card – effectively a limited distribution credit card
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12: E-marketing
Topic List E-marketing Customer relationship management
This chapter is concerned with the way that Internet technology can be used to build and sustain marketing relationships.
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E-marketing
Customer relationship management
E-marketing has been defined as ‘the application of the Internet and related digital technologies to achieve marketing objectives’ (Chaffey). Functions of Internet marketing
Specific benefits of Internet marketing
Creating company and product awareness
Global reach
Branding via website advertising
Lower cost
Offering incentives
Ability to track and measure results
Lead generation via interaction
24 hour marketing
Customer service
Personalisation/‘one to one’
Email databases
More interesting campaigns
Online transactions
Better conversion rate
Any online e-communication must be consistent with the overall marketing goals and current marketing efforts of the organisation.
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Developing an effective e-marketing plan ‘SOSTAC’® planning framework (Paul Smith) E-BUSINESS STRATEGY Opportunities and threats, PESTEL factors. Analysis of demand, competitors, resources and intermediaries Marketing research; Analysis of webserver log files Tasks Resources, Partnering & outsourcing
Situational analysis Control
Objectives
Actions
Strategy
Tactics
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Use SMART mnemonic. Assessment of online revenue contribution Target market strategy segmentation, positioning 7Ps - product, price, place, promotion, people, process and physical evidence
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E-marketing
E-marketing planning Competitor analysis
Customer relationship management
Scan competitor websites; benchmark e-commerce services
Intermediary analysis
Search portals for new approaches; research competitor intermediary policy; identity and compare intermediaries
Marketing audit
Measurement: acquisition costs, leads, sales, ROI. Use web analytics to measure impact of leads; sales and brand effects delivered over the Internet; create online CRM capability
Objective setting
Online revenue contribution
Strategy
Online value proposition; identify target online segments
Tactics
Use Internet to vary the extended product Consider new channel structures Automate processes: autoresponder, FAQs, virtual assistants Online branding Online marketing communications eg email selling, search engine advertising
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Characteristics of the media of e-marketing – the 6 Is Plans should accommodate and exploit the 6 ‘I’ characteristics Independence of location
Global reach of electronic products and services opens previously inaccessible markets for exploitation
Industry structure
Redesign of business processes; new market boundaries and segments; ITenabled services
Integration
Widespread, effective use of detailed customer information throughout business enables value added through product configuration, pricing, delivery and so on.
Interactivity
Customers can participate in a marketing dialogue; communications and responses can be specifically targeted.
Individualisation
Tailored products, services and communications
Intelligence
Detailed customer information can be collected via interactivity
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E-marketing
Customer relationship management
E-marketing and the marketing mix (7Ps) 1
Product
interactivity, more information, opportunities to customise and augment the product
2
Price
the Internet has made pricing very competitive; increased price transparency and the ability to ‘shop around’
3
Place
new market places and channel structures. Since the Internet has global reach, customer convenience is very important.
4
Promotion
reach more customers; target more specifically; use of email; banner advertising
5
People
people can be replaced with automated processes, such as ‘FAQ’ pages on web
6
Process
new processes are required for online marketing, linking to other operational systems
7
Physical evidence customers’ experience such as ease of use of website, navigation, availability and overall performance. Responsiveness to email enquiries is a key aspect.
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One of the most complex decisions involved in the marketing mix is setting the price of the goods. Eight step process for determining price Select a pricing strategy (eg low price or high price) Assess target market's evaluation of price and its ability to pay Determine the nature and price elasticity of demand Analyse demand, cost and profit relationships Evaluate competitor's prices Determine the basis for pricing Select a primary strategy Determine the final price Page 135
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E-marketing
Customer relationship management
Online branding A brand is a means of differentiating essentially identical products. It is effective to the extent that its production can generate positive associations (‘brand values’) such as quality, style, value for money, advanced technology. Visual identity is the basic element of ordinary branding: this remains important online, but the domain name assumes equal significance. Online brand options
1
Migrate traditional brand online
2
The values of the traditional brand may be inappropriate to the online extended product, so a variation may be required in the name or another element of the brand.
Works if brand is well-known, but online failure can taint original brand.
3
Partner with existing digital brand A combination a brand names and values may be ideal for new online product offering. It can also protect against imitations.
Extend traditional brand
4
Create a new online brand Appropriate especially if the existing brand values do not relate well to the online experience. Basic rules of branding apply.
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E-marketing
Customer relationship management
Customer relationship management is the establishment, development, maintenance and optimisation of long-term mutually valuable relationships between consumers and organisations.
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Retention
Extension
Add value
Add value
Add value
Promotion Incentives Services Profiles Customer service Direct e-mail
Extranets Personalisation Community Promotions Loyal schemes
Customer selection
Acquisition
Customer selection
Customer selection
Phases of CRM in e-business and e-commerce management (Chaffey)
Direct e-mail I learning On-site promotions
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E-marketing
Customer relationship management
Modern computer database systems enable rapid processing and analysis of customer data for relationship marketing purposes.
Differences between transactional and relationship marketing Transactional
Relationship
Importance of single sale
Importance of customer relationship
Importance of product features
Importance of customer benefits
Short time scale
Longer time scale
Less emphasis on service
High customer service (customer centric)
Quality is concern of production
Quality is concern of all
Competitive commitment
High customer commitment
Persuasive communication
Regular communication
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Customer acquisition online 1
Search engine optimisation of web page design can put a supplier high up in search engine listings thus generating more enquiries from intending purchasers.
5
Viral marketing attempts to harness the online equivalent of word of mouth by providing easy to send web pages and links, and by promoting discussion.
2
Newsgroups and discussion forums may be offered in house or sponsored externally to promote contact with existing and potential customers
6
Banner advertising on websites may be paid for per click or action, for example.
3
7
E-newsletters can nurture prospects.
Email is used for advert communication to established address databases.
4
Link building and partnership compaigns provide mutual hyperlinks and co-ordinated ecommunications
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E-marketing
Customer relationship management
Business and consumer markets' buyer behaviour on the internet Differences
B2B
B2C
Market structure Fewer buyers but larger purchases. Demand largely derived from consumer demand eg, car industry buys steel because consumers buy cars
Many buyers with smaller purchases
Nature of the buying unit
Buying unit differs – more rational approach, more people involved
Individuals or families
Type of purchase
Purchase products to meet specific business needs – want a customised product package. Emphasise economic benefits
Type of buying decision
Purchase products to meet individual or family needs. Purchase from intermediaries Business purchases involve a more complex decision-making process Buy on impulse or with minimal with formal, lengthy purchasing policies. processes
Communication Existing customers can be contacted directly. Information is placed on the web to support customers and encourage loyalty. differences Website content should be tailored to the needs of users, influencers and deciders
Promoting the website uses methods such as banner ads and search engines
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Applications of database marketing techniques (Allen et al) Project
Method
Identify the best customers
Use RFM analysis (Recency of the latest purchase, Frequency of purchases and Monetary value of all purchases) to determine which customers are most profitable to market to.
Develop new customers
Collect lists of potential customers to incorporate into the database.
Tailor messages based on customer Target mail and e-mail based on the types and frequency of purchases usage indicated by the customer's purchase profile. Recognise customers after purchase Reinforce the purchase decision by appropriate follow-up. Cross-sell related and complementary products Personalise customer service
Use the customer purchase database to identify opportunities to suggest additional products during the buying session. Online purchase data can prompt customer service representatives to show that the customer is recognised, his or her needs known and his or her time (for example, in giving details) valued.
Eliminating conflicting or confusing communications
Present a coherent image over time to individual customers, however different the message is to different customer groups. (For example, don't keep sending 'dear first-time customer' messages to long-standing customers!) Remember the Integrated Marketing Communications approach
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E-marketing
Customer relationship management
Datamining is a set of statistical techniques used to identify trends, patterns and relationships in data. It may be predictive or descriptive.
Customer relationship management Three aspects: 1
Operational CRM
supporting ‘front office’ business processes such as call centres
2
Collaborative CRM
covers direct interaction with customers
3
Analytical CRM
analyses customer data for a variety of purposes, eg risk assessment or fraud detection; retention or lapsing rates
CRM systems focus on four general areas: 1 Sales automation: lead management, order taking, sales support 2
Service management: help desk, problem tickets, FAQs
3
Marketing automation: prospects database, campaign management
4
Management reporting: tables, graphics, analysis of data
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CRM solutions Applications Electronic marketing: eg email campaigns
CRM system functionality
Target mailing: based on sales history
Scalability: the ability to expand the system as the scale of operations increases.
Sales analysis: details of sales achieved can indicate prospects for further, related sales
Multiple communication channels such as phone, WAP and email.
Order building: order takers can be provided with customer details, purchasing habits and order history.
Workflow: automatic rule-based routing through the system
Back office integration Existing data must be integrated with the CRM system so that loose ends are minimised; eg an order taker must have access to inventory records Page 143
Databases are fundamental for storing customer-related information Customer privacy: eg data encryption, must be a high priority.
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Notes
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13: Project management Topic List The nature of project management The project lifecycle Building the business case Practical aspects of project planning Project management Controlling projects Project management software
The syllabus emphasises the relationship between project management and strategy.
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Practical aspects of project planning
Project management
Controlling projects
Project management software
A project is an undertaking that has a beginning and an end and is carried out to meet established goals within cost, schedule and quality objectives. (Haynes, Project Management)
Project management objectives
Quality Budget Timescale
The outcome must meet the specification. Authorised expenditure must not be exceeded. Deadlines must be met.
Why projects go wrong
Project management problems
Need for team building Identified difficulties Unexpected problems No client benefit before completion/delayed benefits Management of specialist input Wide range of stakeholders
Unproven technology Changing client specifications Politics at all levels/lack of management support Poor project management Over optimism Poor leadership by technical experts Poor planning Poor control
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The processes involved in project management can be summarised as follows. Plan/replan project
Take corrective action
Compare actual progress to project plan
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Perform tasks
Measure progress
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Project management
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Projects and strategy Project management can make major contributions to business strategy. Rapid environmental development forces organisational response: a project management approach to strategic change may be fruitful. Project management and change management are intimately linked. Much strategic implementation can be configured into projects. Many projects emerge in a bottom-up fashion: they must be screened to ensure that they support overall strategy, and managed with strategic awareness so that they deliver what the organisation actually needs. The process of developing strategy is often fragmented and incremental; the development of strategy may be improved by treating it as a project to be managed. ‘A breakthrough project is a project that will have a material impact on either the business’s external competitive edge, its internal capabilities or its financial performance’. (Grundy and Brown)
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4
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The project lifecycle
Selection of project from pool of proposals using strategic criteria: suitability, acceptability, feasibility Definition of objectives, scope, opportunities, threats, risk, cost, difficulty, stakeholders Techniques: fishbone analysis, performance drivers, gap, ‘from-to’ and stakeholder analyses Initiating tasks: naming of project sponsor and manager, preparation of project initiation document and business case, identifying constraints (scope, time, cost)
Definition
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Design Detailed planning for activity costs, quality, time, risk. Creation of budgets Work breakdown structure, dependencies and interactions, network analysis, PERT, use of project management software to generate plans Resource allocation
Development Aim: to improve the organisation’s overall ability to manage projects. Immediate review to provide rapid feedback where urgent action is required eg training, procedure change Longer-term review to determine overall success. Consideration of lifetime costs Benefits realisation
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3
Delivery Assembly and use of resources People management Control of progress Progress reports Completion (or abandonment) Handover 13: Project management
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The business case is used to secure funding, then revisited and revised during the life of the project. Elements of a business case
Introduction Management summary Description of current situation Options considered Analysis of costs and benefits Investment appraisal Impact assessment Recommendations Appendices and supporting information
A business case should be based on the ability to measure each benefit and estimate expected improvements. Benefits can be classified as either observable, measurable, quantifiable or financial. OBSERVABLE: Measure by experience/judgment MEASURABLE: Can be measured but can't quantify expected improvement at outset. QUANTIFIABLE: Can reliably forecast level of improvement from benefit at outset. FINANCIAL: Quantified benefits that have had a financial formula applied to it to produce a financial value.
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Evaluation of Costs and Benefits Approach
Decision of criteria
Advantages
Accounting Rate of Return (ARR)
Acceptable projects achieve target ARR Select project with highest ARR
Consistent with ROCE Result expressed as a percentage
Ignores time factor Based on profits not cash Difficult if comparing investments of different size
Pay back Period (PP)
Acceptable projects have PP shorter than target PP Select project with shortest PP
Quick and easy to calculate Easily understood Emphasises importance of liquidity
Ignores cash flows after pay back date Ignores many risks Not linked to promoting increases in organisational and shareholder wealth
Net Present Value (NPV)
Acceptable projects return a positive NPV Select project with highest NVP
Consider all costs and benefits Allows for timing of costs and benefits Aligns with business objective of increasing wealth
Acceptable projects have IRR greater than cost of capital Select project with highest IRR
Internal Rate of Return (IRR)
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Consider all costs and benefits Allows for timing of costs and benefits
Limitations
Does not relate directly to shareholder wealth Ignores scale of investment Can be unreliable it cashflows are unconventional 13: Project management
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Delivering the benefits
A benefit owner should be assigned to each individual benefit Change owners may also be required to ensure benefits are fully realised A benefits realisation plan should be included as part of the business case
Benefits realisation plan
Full description of each benefit, change and responsibilites (ie benefit owners and change owners)
Measures for each benefit Measurements to establish current baseline Agreed ownership of changes and actions Evidence to be used to assess success of each change Benefit dependency network identifying benefit and change relationships
Project management software
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Work breakdown structure is the analysis of the project into units stages and tasks. It establishes time estimates, resource and materials estimates, and identifies direct and overhead costs. Gantt charts plan and record activities ACTIVITY
TIME
1 2 3 4 5
Resource histograms plan and control resources UNITS 8 7 6 5 4 3 2 1 7
Network analysis plans and controls the sequence of activities. The critical path through the network determines the minimum time the project will take. Float time allows for some flexibility in the use of resources. Page 153
14
C
21
35
42
L
F
H
M
B D
DAYS
G
E
A
28
J
K
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Controlling projects
Project management software
The person who takes ultimate responsibility for ensuring the desired result is achieved on time and within budget is the project manager. The project manager has responsibilities to management (eg to keep them informed), to the project itself, and to the project team (eg ensuring that the team has the resources required). Skills required
Duties of the project manager
Planning Obtaining resources Teambuilding Communication Co-ordinating project activities Monitoring and control Problem resolution Quality control
Leadership and team building Organisational ability Understanding of the way that groups interact Written and spoken communication skills Interpersonal/negotiation skills Technical knowledge of the issues involved Problem solving Change control/change management
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A group differs from a random collection of people in that its members perceive themselves to be a group. They have:
Development of the team – Tuckman
A sense of identity Loyalty to the group Purpose and leadership
Forming. The team is still a collection of individuals jockeying for position. Aims, norms and personalities are probably unclear and no leader is likely to have emerged.
Multidisciplinary team Members have different skills, knowledge and experience. Such teams can solve problems with cross-disciplinary aspects.
Multi-skilled team
Storming. There may be open conflict as objectives and norms are set and revised. Trust increases. Norming. The team settles down and creates norms for output, worksharing and individual needs. Performing. The team is sufficiently integrated to perform its task.
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A contingency approach to team effectiveness (Handy) GROUP LEADERSHIP MOTIVATION PROCESSES PROCEDURES STYLE THE OUTCOMES
THE GIVENS 1. The group’s members
1. Productivity
2. The group’s task 3. The group’s environment
INTERVENING FACTORS
2. Group satisfaction
Members: Belbin identified that the members of effective teams play different roles within the team Task: Degree of urgency, complexity and importance influence both group and manager Process and procedures: A team that tackles its work systematically will be more effective than one that muddles through Motivation and leadership: High productivity outcomes may be achieved if work is arranged so that satisfaction of individuals’ needs coincides with high output. Style of leadership can also affect the outcome.
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Team roles – Belbin Effective teams have members who between them are capable of fulfilling nine vital roles: 1 Co-ordinator Presides and co-ordinates; balanced, disciplined, good at working through others. Mature and confident. 2 Shaper Highly strung, dominant, extrovert, passionate about the task itself, a spur to action.
6
Introverted, but intellectually dominant and imaginative; source of ideas and proposals but with disadvantages of introversion. Monitor-evaluator Analytically (rather than creatively) intelligent; dissects ideas, spots flaws; judges accurately. Resource-investigator Sociable, extrovert, relaxed; source of new contacts, but not an originator; explores opportunities. Implementer Practical organiser, turning ideas into tasks; trustworthy and efficient, but not excited.
7
Team worker
Supportive, understanding, diplomatic; popular, uncompetitive and mild.
8
Completer
Attends to details and delivery; conscientious and anxious.
9
Specialist
Dedicated, knowledgeable, single-minded.
3
4
5
Plant
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A progress report shows the current status of the project, usually in relation to the planned status. Where actual progress is slower than planned, slippage has occurred. Slippage can be dealt with using a variety of options:
Do nothing Add resources to make up lost ground ‘Work smarter’ to be more efficient Replan Reschedule, ie change the phasing Introduce incentives to enhance individual performance Change the specification
If the plan is to be changed, ask the following questions: – What are the consequences of not implementing the change? – What is the impact of the change on time, cost and quality? – What are the expected costs and benefits of the change? – What are the associated risks? (Use a risk assessment matrix) If a project starts to slip, but has a fixed deadline and cannot be delayed, a project manager should consider fast-tracking and crashing.
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Risk management
Benefits realisation
Can be viewed as a six-stage process:
Undertaking a project should bring benefits. Part of the completion review is the measurement of benefits realised. This requires a measurement of the state before project start, the creation of a benefits profile stating benefits anticipated and measuring of benefits actually achieved.
1
Plan approach based on attitude to risk
2
Identify and record risks in risk register
3
Assess risks – Probability – Consequences Plan and record responses – Avoidance – Mitigation – Transfer – Absorption Implement risk management strategies
4
5 6
Post completion audit An organisation should undertake a formal review of the project once it has been completed to examine the lessons that may be learned and used for the benefit of future projects.
Review risk management approach and actions for adequacy
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Practical aspects of project planning
Project management
Controlling projects
Project management software
Project management software can be used to help project planning and control. Planning – Software can be very useful for scheduling resource usage (network diagrams; Gantt charts; ‘what if?’ analysis) Estimating – Store data about tasks to provide more accurate estimates for similar tasks in future Monitoring – Monitor actual progress, and automatically update the plan for critical path. Should help provide an early warning of any risks to the project. Reporting – Progress reports can be generated to help co-ordinate activities. Advantages
Disadvantages
Enables quick re-planning
May be difficult to use
Document quality
Unnecessary for small, stand-alone projects
Encourages constant progress tracking ‘What if’ analysis
Managers spend too much time producing documents rather than managing the project
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14: Finance Topic List Finance and strategy Financial management decisions Cash forecasts Obtaining equity funds Bank loans and loan capital Budgets Evaluating strategic options Ratio analysis Comparison of accounting figures
This chapter considers the important issues to be evaluated when assessing alternative financial strategies for an organisation.
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Cash forecasts
Obtaining equity funds
Bank loans and loan capital
Budgets
There are three broad issues of finance 1
Managing for value Creating value for shareholders Revenue/cash generation Dividend payments/share price Understanding cost and value drivers Obtaining value for money (public sector)
2
3
Financial expectations of stakeholders Employee salary expectations Shareholders – dividends or capital growth? Trading partners expecting solvency and liquidity Customers expecting value for money
Funding strategies Degree of financial risk accepted and implication of proposed strategies for gearing
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Cash forecasts
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Obtaining equity funds
Bank loans and loan capital
Budgets
In seeking to attain the financial objectives of an organisation, a financial manager has to make decisions on three topics:
Investment decisions
Financing decisions
Investment decisions include:
Financial decisions include:
Long-term capital structure: need to determine source, cost and risk of long-term finance.
New projects Takeovers Mergers Sell-off/divestment
The financial manager must: Identify investment opportunities Evaluate them Decide optimal funding
Short-term working capital management: balance between profitability and liquidity is crucial.
Dividend decisions Dividend decisions may affect views of the company’s long-term prospects, and thus the shares’ market value. Payment of dividends limits the amount of retained earnings available for re-investment.
Consider interaction of decisions, eg paying out dividends leaves less funds available to finance investments.
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Cash forecasts
Obtaining equity funds
Bank loans and loan capital
Budgets
Cash forecasting should ensure that sufficient funds will be available, when needed, to sustain the activities of an enterprise at an acceptable cost. A cash budget or forecast is a detailed budget of estimated cash inflows and outflows incorporating both revenue and capital items. Cash forecasts can help in planning the structure of an organisation’s finances How much cash is required When it is required How long it is required for Whether it will be available from anticipated sources A business will also need to take account of economic variables (such as inflation, interest rates) and business variables (such as changes in the competitive environment). Cash deficits will be funded in different ways, depending on whether they are short or long term. Businesses should have procedures for investing surpluses with appropriate levels of risk and return.
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Obtaining equity funds
Bank loans and loan capital
Budgets
Equity is the issued ordinary share capital plus reserves which represent the investment in a company by its ordinary shareholders.
Retained profits are a source of equity funding. This approach is flexible and does not change the pattern of shareholdings. However, shareholders may prefer the cash to be distributed as dividends.
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Equity shares maybe issued to: Raise cash To obtain a stock market listing To take over another company (by issuing shares to the shareholders of the other company)
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Cash forecasts
Obtaining equity funds
Bank loans and loan capital
Budgets
Overdrafts and loans Overdrafts are used for short-term financing needs. A maximum facility is granted; the bank will want any longterm balance reduced. Overdrafts are repayable on demand; security may be over specific assets or over the whole business. Loans are medium and long-term. The organisation won’t be subject to the publicity requirements or costs of a loan stock issue on the stock exchange, but will have to make regular interest payments. Security or restrictive covenants may be imposed. Overdrafts
Designed for day to day help Only pay interest when overdrawn Bank has flexibility to review Can be renewed Won’t affect gearing calculation
Overdrafts v loans
Loans
Medium/long-term purposes Interest and repayments set in advance Bank won’t withdraw at short notice Shouldn’t exceed asset life Can have loan-overdraft mix
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Loan capital or loan stock is debentures and other long-term loans to a business. It has a nominal value, which is the debt owed by the company, and interest is paid at a stated coupon on this amount.
Example Company issues “10% loan stock” Coupon is therefore 10% of the nominal value So, $100 of stock will receive $10 interest each year (gross before tax)
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Financial management decisions
Cash forecasts
Budgets convert strategic plans into specific targets Mission Strategic objectives Sets overall direction
Shows how mission will be acheived
Promote forward thinking Helps co-ordinate aspects of organisation Motivates performance Provides basis for system of control Provides system of authorisation
Limitations of budgets
Benefits may be in conflict with each other May demotivate if unattainable Slack may be built in Focus on short-term Unrealistic budgets may lead to poor decisions
Obtaining equity funds
Strategic plans Shows how objectives will be pursued
Benefits of budgets
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Bank loans and loan capital
Budgets
Budgets Short-term plans and targets to fulfil strategic objectives
Features of successful budgetary control systems
Senior management take system seriously Clear responsibilities and accountability Targets are challenging but achievable Established data collection, analysis and reporting routines Targeted reporting Short reporting periods Timely reporting Provokes action
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Evaluating strategic options
Ratio analysis
Comparison of accounting figures
Relevant costs and marginal costing are useful for evaluating strategic options.
Accepting/rejecting special contracts
Make or buy decisions
Determine contribution (revenue less costs)
Use marginal costing to identify contibution for both options
Accept if positive contribution May be other factors to consider, eg negative contribution but may lead to more lucrative contracts
Efficient use of scarce resources Most profitable combination is where the contribution per unit of the scarce resource (eg labour) is maximised
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Select highest but there may be other factors to consider
Closing or continuation decisions Determine contribution to overall organisation made by individual department Departments that make a positive contribution should not be closed even if it makes a net loss overall (fixed costs incurred regardless) 14: Finance
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Evaluating strategic options
Remember!
Comparison of accounting figures
Consider the requirements of the question and the contents of the scenario carefully before calculating ratios. The examiner will be looking for relevant ratios accompanied by meaningful comments, including appropriate comments on the limitations of ratio analysis.
Liquidity ratios
Profitability and return
Ratio analysis
Return on capital employed (ROCE) Profit margin Asset turnover
Current ratio Inventory turnover Account receivable days
Quick (acid test) ratio Account payable days
Debt and gearing Stock market ratios
Debt ratio (Total debts: Assets) Capital gearing (Proportion of debt in long-term capital) Interest cover Cash flow ratio (Cash inflow: Total debts)
Dividend yield Earnings per share Price/earnings ratio
Interest yield Dividend cover
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Evaluating strategic options
Comparisons with companies in different industries
Comparisons with other companies in same industry
Investors aiming for diversified portfolios need to know differences between industrial sectors.
These can put improvements on previous years into perspective if other companies are doing better, and provide further evidence of effect of general trends.
Sales growth Profit growth ROCE P/E ratios Dividend yields
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Growth rates Retained profits Non-current asset levels
Ratio analysis
Comparison of accounting figures
Comparisons with previous years
% growth in profit % growth in turnover Changes in gearing ratio Changes in current/quick ratios Changes in inventory/receivables turnover Changes in EPS, market price, dividend Remember, however: Inflation – can make figures misleading Results in rest of industry/environment, or economic changes to give context 14: Finance
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Notes
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15: Human resource management
Topic List Strategic leadership Job design HRM and knowledge work An overview of job design Staff development
This chapter looks at the various ways that staff can contribute towards organisational success, through effective management of the workforce’s efforts.
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Job design
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HRM and knowledge work
An overview of job design
Staff development
Trait theories
Behavioural theories
Pre-suppose that some people are inherently suited to leadership positions. They have been criticised as rooted in a class-based social structure; it is widely accepted that leadership is about behaviour and can be taught. Nevertheless, there is evidence that some personal traits can support leadership effectiveness.
Range from McGregor’s Theory X and Theory Y through the concept of a spectrum of leadership styles developed by Lewin, Likert, and Tannenbaum and Schmidt, to Blake and Mouton’s 2 axis model.
Transformational theories Contrast with transactional theories (all others on this page). Transformational theories emphasise teams, change and vision to deal with rapid development in the environment. Van Maurick lists 5 expectations of modern leaders:
Change organisations from within Empower others Team work and delayering Clarity of purpose and direction Visionary strategies
Contingency theories Adair Effective leaders attend to task needs, group needs and individual needs Fiedler Leadership style depends on personality; effectiveness depends on 3 situational variables Position power – authority Task structure – clear, well-defined Leader/subordinate relations Task orientated approach suitable when situation very favourable or very unfavourable – in less extreme cases, a people centred approach is more effective.
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HRM and knowledge work
An overview of job design
Staff development
JOB DESIGN is all about organising work – four approaches are identified. 1
Scientific Management
The pursuit of productivity via efficient methods – use of 'work study' (one best way to do a job); leads to deskilling, alienation and quality problems.
3
Japanese model
Flexible manufacturing, with emphasis upon quality and the minimisation of waste, via multi-skilled workers. Brings problems of control, so depends on social mechanisms that enchance commitment.
2
Job enrichment
Making work more meaningful – importance of motivation and non-monetary rewards. Makes full use of ability, provides task identity and closure, autonomony and feedback. 4
Re-engineering
Business process re-engineering also affects job design when entire tasks within the process have to be altered to promote efficiency.
All job design must reconcile the need to exploit specialisation and the division of labour, with the need to integrate and control the fragmented activities that result. Page 175
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HRM and knowledge work
An overview of job design
Staff development
Approaches to job design Features
Assumptions about motivation Pay – piecework
Job design
Scientific Management
Prescribed standard methods
Extreme specialisation. Split of planning and doing
Human relations/ job enrichment
Work groups. Combination Social needs. Achievement, of tasks. Some control over growth, responsibility planning
Less extreme, with some control tasks shifted downwards
Japanese style
JIT, TQM, consensus, Social processes of clan lifetime employment, loyalty control
Multi-skilling to achieve flexibility
BPR
Strong leadership from the Emphasis on market discipline Process teams. Empowerment. top. Exploitation of IT. and serving the needs of the Multidimensional jobs Abandonment of traditional customer structures and methods
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HRM and knowledge work
An overview of job design
Staff development
Knowledge is a vital strategic asset and must be managed. Since it primarily exists in the brains of employees, they must be managed in a way that stimulates learning and creativity.
The move to knowledge work From
To
Type of work
Individual
Project teams
Focus
Task performance
Customers, problems, opportunities
Skills and knowledge
Narrow
Specialist but with wide interest
Feedback and results
Rapid
Slow
Employee loyalty
Organisation and career within it
Peers, profession
Contribution to success
Individual support to the wider strategy A few major successes
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HRM and knowledge work
An overview of job design
Staff development
Human resource development (HRD) can be viewed as an investment in strategic capability, since it improves both skills and commitment. Investment in people is akin to investing in any other type of asset – people become ‘human capital’. This can be either ‘top-down’ (driven by management) or ‘bottom-up’ (empowered employees recognise their own skills gaps).
Competences The required outcomes expected from the performance of a task in a work role, expressed as performance standards with criteria.
Succession planning Succession planning provides for continuity of leadership and facilitates management development at all levels, by focusing it on objectives that support overall strategy. The plan should focus on future requirements Top management should drive the plan, not the HR specialists A pool of talent and trained ability is a more useful asset than simple identification of succession candidates Assessment should be objective and not given precedence over development
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16: Strategic development
Topic List Realised strategy Developing intended strategies Developing emergent strategies Challenges and implications
This chapter is devoted to looking at the wider processes by which strategies come into existence.
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Realised strategy
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Developing intended strategies
Developing emergent strategies
Challenges and implications
The 'strategy as design' lens sees strategy as an essentially managerial process. Understanding of the strategic position informs strategic choice: and this choice creates intention. Strategy into action is about how that intention is realised. A fully realised strategy can also arise in the ways illustrated by the two other strategy lenses, experience and ideas. Such strategies emerge rather than being the result of any kind of complex, top down management process. Also, remember that managers’ intentions may not actually be realised: this can happen for a variety of reasons, such as lack of resources, failures of forecasting, lack of control and so on.
Emergent strategy Realised strategy
Intended strategy Unrealised strategy
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Formal strategic planning systems Formal strategic planning systems Strategic position Vision mission PESTEL
SWOT
Position audit
The strategic planning approach is formal, logical, detailed and costly. It is thorough because it involves a large planning staff. However, it is no longer popular, largely because it is unwieldy and slow to respond to changing circumstances. An important aspect of the formal approach is its comprehensiveness. Even when strategy is not made in this fashion, the rational model of strategy offers a useful checklist of activities and decision areas that may be of value to strategic planners in avoiding obvious errors.
Strategic choice
Generate options eg generic strategies, market based strategies Graduate options
Strategic implementation Projects Resources Change e-business etc
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Feedback control
See your Study Text for a more comprehensive version of this diagram.
Actual performance
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Realised strategy
Advantages
Identifies risks Forces managers to think Forces decision-making Formal targets enable control Enforces organisational coherence and co-ordination Disadvantages
Not proven to bring advantage May become over formal and reduce initiative Assumes internal politics do not exist Assumes managers know everything Divorces planning from doing Cannot cope with shocks and discontinuities
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Developing intended strategies
Developing emergent strategies
Challenges and implications
Large scale planning departments were used in the mid 20th century to operate the formal approach. More recently, other more flexible techniques have been used. Workshops and project teams Can be set up at any level to consider problems Can work within overall strategic direction from above Can undertake strategic analysis Can generate new ideas and approaches Can work on strategic change Consultants Can lend authority and credibility to top management Can bring fresh approach to confused situations Can bring wide experience and knowledge Can have wide range of roles in change management May assist with strategic decisions Imposed strategy Powerful external stakeholders can constrain decisions about strategy. Very obvious in public sector where government policy sets the framework for decisions.
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Realised strategy
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Developing intended strategies
Developing emergent strategies
Challenges and implications
Emergent strategies do not arise in a random way: they require extensive management Strategies may emerge through a process of logical incrementalism: ‘the deliberate development of strategy by experimentation and learning from partial commitments’. Generalised view of goals Constant environmental scanning rather than firm forecasts Combination of strong core business and experiments with options by project groups Formal and informal processes of development
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Resource allocation routines Strategy can emerge from bids for funds by intermediate level managers: top management set the strategic context and choose from the options presented. Political processes within the organisation can have major influence on the negotiation among internal and external interest groups. These processes can influence both information flows and strategic analysis. They can also lead to innovation.
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Developing intended strategies
Developing emergent strategies
Challenges and implications
Danger! Strategy can emerge from the assumptions and practices of the paradigm. This brings experience of past success to the problem. However, this process can lead to strategic drift, especially if major organisational change is required.
Strategic drift Occurs when strategies progressively fail to address the strategic position of the organisation and performance deteriorates.
Johnson, Scholes and Whittington suggest that strategic drift arises because organisations prefer small adjustments to large ones.
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Developing intended strategies
Developing emergent strategies
Challenges and implications
You need to remember that there is no single correct way to develop strategy – an effective strategy may result from the simultaneous working of several processes. Strategy development is likely to vary at different times and in different contexts. As part of strategic management, an organisation’s environment can be analysed in terms of complexity and change:
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Developing intended strategies
Developing emergent strategies
Challenges and implications
At the end of the syllabus, review the subject of strategy as a whole, and think how all the components fit together, using the relational diagram of syllabus capabilities for P3 as a guide: Strategic position (A)
Business and process change (D)
Strategic action (C)
Strategic choices (B)
Project management (F)
Information technology (E)
Financial analysis (G)
People (H)
Remember the importance of having an overall strategic perspective (position, choice, action).
Remember also the need for all the components of an organisation (middle and bottom layers) to fit with, and support, that overall strategy; and finally remember that sometimes stategy can emerge from those middle and bottom layers rather than being imposed by the strategic apex.
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Notes
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Notes
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